Kaufman and Canoles

Kaufman & Canoles Law Blog

Employee Benefits, ESOPs & Executive Compensation Law

Wednesday, February 5, 2014

Appeals Court Ruling Raises Pension Liability Issues for Private Equity Funds

After years of threats from Congress and tax-reform advocates, private equity fund sponsors have been dealt a potential setback from an unlikely source: The federal 1st Circuit Court of Appeals. The court’s recent decision in Sun Capital Partners III, L.P. v. New England Teamsters could make private equity funds liable for their portfolio companies’ underfunded pension obligations, a potentially massive liability in some transactions that will require careful pre-closing structuring to sidestep. The ruling has also rekindled the debate over the tax treatment of fund sponsors’ profits, which relies on investor status to achieve favorable capital gains rates on their earnings.

ERISA historically protected private equity funds from their portfolio companies’ underfunded pensions. Under ERISA, which governs liability in this context, any “trade or business” under “common control” with a pension plan sponsor is jointly liable for the sponsor’s pension obligations. That includes underfunding liabilities.

A “trade or business” generally is limited to an active, continuous operation that exists to make a profit or income. Common control exists where one entity owns at least 80% of another entity, usually seen with parent companies that own at least 80% of a subsidiary company. Crucially, though, common control can flow up to a parent company and back down to other subsidiaries.

In contrast to operating companies, private equity funds historically have been considered passive investors rather than active trades or businesses under ERISA. As a result, they have avoided pension liabilities of their portfolio companies, even where the fund owned 100% of the portfolio company’s stock. This view has prevailed almost universally until recently, when both the PBGC and a federal district court opined that private equity funds could be trades or businesses under the so-called “investment plus” approach (though neither of those pronouncements created binding law).

Earlier this year, the 1st Circuit followed this tack: After reviewing the Sun Capital fund’s active management of its portfolio company—in circumstances very typical for private equity investments—it concluded that the fund was so involved in running the portfolio company that it became an active “trade or business,” eliminating the primary justification for shielding private equity funds from pension liabilities in distressed portfolio companies. The court followed the PBGC’s “investment plus” approach—but declined to explain what any particular “plus” might be—in holding that the Sun Capital funds were not merely passive investors without ERISA liability. (The court did, however, highlight as one important factor the fact that the fund received an offset of fees charged by the management company for fees paid by the fund’s portfolio companies.) Unlike the PBGC’s and district court’s non-binding positions, the 1st Circuit’s rationale is now mandatory in all district courts within the 1st Circuit, which covers Maine, Massachusetts, New Hampshire, Rhode Island, and Puerto Rico. And as the first court at this level to apply this approach, the ruling sets an example for future appeals courts across the country.

One important question was left unanswered—whether divided ownership of the portfolio company between two of Sun Capital’s private equity funds (70% in one fund; 30% in another) could be aggregated for purposes of common control under ERISA. Allowing aggregation would result in common control even where no single entity owns 80% of the portfolio company. Regardless of this outcome, the “trade or business” prong is the only safeguard preventing pension liability where a fund owns at least 80% of a portfolio company and is therefore categorically under common control. And while the Sun Capital case involved the company’s withdrawal from a multiemployer pension plan, the same ERISA rules govern single-employer pension plans like the earlier example.

Interestingly, though, the Sun Capital decision did hold that prospectively structuring the purchase 70%/30% between two funds was not enough to impose “evade or avoid” liability on the funds, which may result if one fund owns at least 80% of the company and attempts to later restructure its ownership to avoid ERISA liability.

In the wake of the Sun Capital  case, fund sponsors should closely review any existing pension funding problems in their portfolio companies. Going forward, fund sponsors should diligently address a target’s pension plan—and the target’s ability to continue meeting its funding obligations—before closing on a transaction. If any problems exist, fund sponsors should either address them with the sellers or attempt to structure the deal to circumvent the common control provisions now that the “trade or business” safeguard no longer provides protection with any certainty. If pension underfunding issues cannot be fully resolved before closing, funds may consider buying less than 80% of the outstanding equity or being prepared to assume any pension liabilities. Sponsors must also remember that common control can flow up to the fund and back down to its other portfolio companies, putting the entire range of the fund’s investments at risk, so they should fully consider the wide-reaching effects of this scenario before acquiring a company with serious pension troubles. 

Kaufman & Canoles prides itself on resolving the most daunting challenges—or avoiding them altogether. Whether you’re new to the game or a seasoned professional, our attorneys draw from diverse backgrounds in employee benefits, mergers and acquisitions, private equity fund formation, and corporate law to distill your most complicated legal situations down to sound business advice. So when you’re ready to go to the next level, we can take you there. And we will. – Robert Q. Johnson

Friday, November 1, 2013

Updated Qualified Retirement Plan Limits For 2014

The IRS released on October 31st, 2013 the updated qualified retirement plan limits for 2014. 

Many of the limits are unchanged from 2013, including IRA contribution limits of $5,500, maximum elective participant deferrals to 401(k), 403(b), and 457(b) plans of $17,500 and the respective catch-up contribution limits of $1,000 and $5,500. 

The maximum annual defined contribution amount got a slight bump from $51,000 to $52,000, as did compensation that may be taken into account for qualified plans, which rose from $255,000 to $260,000.

In a separate announcement we’ve also learned the Social Security taxable wage base will rise from $113,700 to $117,000. 

You can see Kaufman & Canoles’ full chart showing all the relevant limits for 2014 and the prior 5 years here.

Tuesday, September 17, 2013

IRS Scrutinizing Private, Tax-Exempt 457(b) Plans

Between now and next September, hundreds of tax-exempt, non-governmental plan sponsors around the country will start receiving letters about their 457(b) deferred-compensation plans from the IRS’s Employee Plans Compliance Unit.  

Only private-sector, tax-exempt entities like hospitals, credit unions, charities, and schools can maintain these types of plans. Often called “top-hat” plans, they allow for up to $17,500 (for 2013) of salary deferrals or employer contributions, and they must benefit only a select group of management or highly compensated employees. With these advantages, however, come pitfalls: the plans must remain unfunded and unsecured and participants may not take loans from their vested balances.

The IRS wants to gather information on how employers are maintaining these tax-favored plans. The compliance questions focus on whether the employer actually is a private, tax-exempt organization, whether participation is limited to management or highly compensated employees (itself a complicated determination), and whether existing plans include any forbidden provisions like plan loans or secured funding vehicles.

A sample copy of the compliance check letter can be found here.

Employers will be allowed to correct any 457(b) plan violations through a process similar to the IRS’s standard plan-correction program, which can involve an expensive user fee payment. But don’t stick your head in the sand: the compliance check letter warns that failing to respond could—and likely will—result in a plan audit.

If you receive one of these compliance check letters—or want to ensure your plan is compliant before you receive one—please feel free to call our experienced employee benefits’ attorneys to help guide you through the process.  —Robert Q. Johnson

Thursday, September 12, 2013

DOL Further Delays New Proposal for Fiduciary Rule

The Department of Labor announced that it is pushing back the timeframe for its release of the highly anticipated re-proposal for expanding fiduciary responsibilities for advisors who work with retirement plans.  A new proposal had been expected to be released early this fall, but DOL representatives stated that nothing will come in October as the DOL continues to revise the proposal in an effort to get the new rule correct rather than released within the previously announced schedule.

The DOL withdrew its previous proposal in 2010 amid industry opposition in order to conduct more thorough cost-benefit analysis.  The original proposal would have driven many independent firms and advisors out of the retirement market by bringing them under the definition of “fiduciary” and, thus, banning their receipt of commissions for providing advice.  This would have left millions of investors without access to affordable retirement advice.

Another effect of the original proposal would have made valuation advisors to employee stock ownership plans fiduciaries to the plans to which they provide valuation services.  This proposal was met with opposition from the ESOP valuation community, who fears it will increase their exposure to liability and increase cost. 

The DOL representatives noted that the new proposal, when released, will undergo the process of soliciting and collecting comments from the public as well as holding at least one public hearing on the matter. As a practical matter, this means the new rules will not go into effect until late 2014, at the earliest. —Christopher L. McLean

Thursday, September 5, 2013

IRS Announces Position on Same-Sex Marriages for Federal Tax Purposes

The Internal Revenue Service released new guidance regarding the tax status of same-sex marriages after the U.S. Supreme Court’s recent decision striking down a portion of the Defense of Marriage Act, or “DOMA,” that limited “spouses” and “marriages” to opposite-sex couples for federal tax purposes.

In June, the Supreme Court struck down that provision of DOMA as unconstitutional when applied to same-sex couples who were married in states recognizing same-sex marriages. But it left unresolved what happened to those married couples if they moved to a state that didn’t recognize same-sex marriages. The new IRS guidance answers that questions for federal tax—including many employee benefits—purposes.

Under the new guidance, the IRS will recognize same-sex marriages for federal tax purposes where a valid marriage was entered into in a state that recognized same-sex marriage, regardless of where the couple now resides. For example, if a same-sex couple was legally married in Maryland, then moved to Virginia, that couple would still be deemed married for all federal tax purposes, even though Virginia does not recognize same-sex marriages. This new rules does not apply to domestic partnerships, civil unions, or any other similar status except legal marriages. It applies only to federal tax provisions, meaning it also will not change state tax rules or any other related issues governed by state law.

Aside from its impact on a massive number of tax code provisions—including the ability of same-sex couples to file joint tax returns—the IRS’s position also impacts many employee benefit plan provisions. For example, in states like Virginia that don’t recognize same-sex marriage, employers who previously offered health insurance coverage to an employee’s same-sex spouse had to include the value of that coverage in the employee’s wages, subjecting it to income, withholding, and payroll taxes. Now, at least for couples validly married in jurisdictions recognizing same-sex marriage, employers will no longer have to add the value of coverage to the employee’s wages. Employees who paid additional taxes because of this arrangement may file amended returns seeking refunds in light of these changes. Notably, employers may also file amended returns seeking a refund of corresponding employer-paid payroll taxes. Similar rules apply to post-tax health insurance premiums for employees’ same-sex spouses who previously weren’t eligible to be covered with pre-tax premiums under the employer’s cafeteria plan. Individuals and employers have three years from the tax deadline to file amended returns for the relevant reporting forms, making it possible to seek a refund by April 15, 2014 for tax years 2010, 2011, and 2012.

Retirement plans will also need changes. Effective September 16, 2013, qualified retirement plans must treat same-sex spouses the same as opposite-sex spouses under qualified plan provisions, including spousal consent rules for beneficiary designations. The IRS anticipates issuing further guidance for retirement plan compliance with this new position, including plan amendments.

Please check back with us as the IRS continues to release guidance. —Robert Q. Johnson

Wednesday, August 28, 2013

35 Days & Counting: Are you ready for the October 1st opening of the new Health Insurance Marketplace?

If you’re like most employers and answered with “What happens on October 1st?” you’d be well advised to get up to speed quickly.

On October 1st you’re required to provide a notice to all your employees regarding the quality and affordability of your current health insurance offering, how you anticipate it might change in 2014 and their new option to shop for coverage through the Marketplace.

 With potential penalties reaching $100 per day per person this requirement deserves your immediate attention.

 As importantly, you need to decide before issuing the notice whether you should make any changes in your insurance offering by January 1st to enable your lower income employees to take advantage of the new government health insurance subsidies.

 For more information, please contact John Peterson or Anna Richardson Smith.
John M. Peterson

Monday, June 24, 2013

Retirement Plan Amendment Deadline Fast Approaching for Governmental Plan Sponsors

The deadline to file a determination letter application with the IRS with regard to all individually designed governmental retirement plans is quickly approaching.

Individually designed retirement plans are required to adopt necessary amendments and file updated plan documents with the IRS every five years. The deadline for the next governmental plan amendment cycle is January 31, 2014. While plan sponsors may elect to postpone the IRS filing for an additional two years, certain interim amendments are required to be adopted in the meantime and penalties for failure to adopt these amendments on a timely basis can be severe. Now is the time to begin the process of reviewing and updating your plan documents (and authorizing ordinances, if applicable) to avoid any IRS penalties.

This IRS deadline applies to individually designed governmental plans and not to prototype or preapproved plan documents. Examples of individually designed plans include municipal retirement systems and other qualified defined benefit pension plans; supplemental retirement plans; optional retirement plans sponsored by state colleges and universities; and cash match plans.

The members of Kaufman & Canoles’ Employee Benefits Practice Group are standing by to assist you with the determination letter process. We will work with you to review your plan documents for required changes, draft any necessary amendments (to plan documents, authorizing ordinances, or both), prepare and submit determination letter applications and required attachments, and interface with the reviewing IRS agents to ensure final receipt of a favorable determination letter. We can also help you determine if alternative plan designs, such as adoption of a prototype or pre-approved plan document, would help reduce costs associated with the determination letter process on an ongoing basis.

With over fifty years of combined experience in qualified plan matters, the members of Kaufman & Canoles’ Employee Benefits Practice Group are fully versed in all legal requirements applicable to governmental retirement plans. In 2011, Kaufman & Canoles was appointed by the Attorney General to serve as Special Counsel for Employee Benefit Matters for the Commonwealth of Virginia. We have drafted plan documents, amendments, ordinances, and determination letter applications for numerous governmental entities, including state colleges and universities, municipalities, and local school boards. Our position as a mid-sized firm headquartered in the Tidewater area also allows us to perform this work at rates that are highly reasonable in comparison to those charged by our larger competitors in Richmond and Washington.
Richard C. Mapp III

Thursday, July 5, 2012

Supreme Court’s “ObamaCare” Ruling and Employer Group Health Plans

In a surprise ruling, the U.S. Supreme Court has upheld all material provisions of the Patient Protection and Affordable Care Act of 2010 (the “ACA”), including the controversial individual mandate that requires taxpayers to obtain health insurance or pay a penalty tax starting in 2014. With much of the uncertainty about the future prospects of the law now lifted, employers should prepare for compliance with upcoming ACA requirements.

The Decision

Writing for a 5-4 majority in National Federation of Independent Business et al. v. Sebelius, conservative Chief Justice John G. Roberts, Jr., found that the ACA individual mandate is a permissible exercise of Congressional taxing authority. The ruling came as a surprise to many observers as it had been widely assumed that the individual mandate would be found unconstitutional, leaving questions about whether the remaining provisions of the law would also be invalidated by the Court. The ruling instead upheld all material provisions of the ACA (other than a Medicaid-specific issue that should not be relevant to employers).

What’s Next for Employers?

Now that the ACA has been upheld, sponsors of employer group health plans must focus on the pressing tasks for compliance under the act. Barring repeal or amendment of the ACA by Congress, a number of requirements, including the following, will go into effect in the near future:

  • W-2 Reporting: Starting with the 2012 taxable year, wages reported on Form W-2 must include the value of employer-provided group health insurance. Employers should determine if they are appropriately tracking group health plan valuation data in order to comply with this new reporting requirement.
  • Cap on Flexible Spending Account Contributions: Beginning with plan years starting in 2013, salary deferral contributions to a health flexible spending account (“FSA”) will be capped at $2,500. This cap should be communicated to participants in open enrollment materials applicable to the 2013 plan year, and appropriate changes should be made to payroll and administrative systems.
  • Medical Loss Ratio Rebates: Beginning in 2011, health insurance companies were required to devote no less than a specified percentage of premiums to the provision of health care (as opposed to overhead or profit margin). Insurers who fail to meet this requirement are required to issue rebates to insured customers. Plans may soon begin receiving rebates associated with 2011 insured health coverage and employers should accordingly determine how to properly distribute or apply the rebates, keeping in mind that these funds will likely be considered to constitute plan assets and that the fiduciary provisions of the Employee Retirement Income Security Act (“ERISA”) will accordingly apply to how the rebates are handled.
  • Summary of Benefits and Coverage: Starting with the first open enrollment period beginning after September 2012, plan sponsors will be required to include a plain-language Summary of Benefits and Coverage (“SBC”) with plan enrollment materials. Employers should watch for guidance and samples to be issued by the Department of Labor and should prepare to draft a SBC for inclusion with 2013 open enrollment materials.
  • Affordable Health Coverage Requirement: Beginning in 2014, employers (other than certain exempt small employers) will be required to make “affordable” health coverage available to all full-time employees or face a “shared responsibility” tax penalty. Future guidance should more precisely define the kind of coverage that must be offered to avoid the penalty. Employers should watch for this guidance, which could require the addition of a low-cost coverage option available to a larger group of employees than are eligible to participate in any current health plans.
  • Cadillac Tax: Beginning in 2018, employers offering health plan coverage that exceeds a threshold value (to be determined in future guidance) will face a punitive “Cadillac Tax.” Employers should watch for guidance defining what level of coverage will trigger the Cadillac Tax and prepare to make any appropriate changes to their health coverage options in order to avoid the tax.


The Supreme Court’s decision is likely to be just the first in a string of federal discussions and actions relating to health care reform. The federal debate will now move to the November elections, where the ACA is expected to serve as a key topic for both parties. For the moment, however, it is premature to expect any quick legislative repeal of any of the ACA’s requirements. Employers should operate under the assumption that all provisions of the ACA will go into effect and should plan accordingly to ensure timely compliance.

Friday, May 18, 2012

Asset Protection – Part 2

III.       Nonqualified Deferred Compensation Plans

Executives and other highly compensated employees frequently receive a portion of their compensation in the form of tax-deferred savings under a nonqualified deferred compensation plan such as a SERP or other “top-hat” plan. As a general matter, until these amounts are paid to the recipient and taxed as ordinary income, the benefits are treated for legal purposes as simply an unfunded promise of the employer’s to pay the employee some stated amount in the future. Employers may set aside assets toward the payment of nonqualified deferred compensation benefits into a “rabbi” trust, but even so the plan is still treated as “unfunded” because assets in the rabbi trust remain available to the employer’s creditors.

Because of the unfunded nature of nonqualified deferred compensation benefits, these benefits are generally unavailable to creditors. The recipient does not have legal title to the benefits until distributed, and there is no specific pool of assets available for creditors to attach. However, depending on how the employer has chosen to design the plan, it is possible that the nonqualified deferred compensation benefits may be subject to certain kinds of creditor claims. For instance, it is common for nonqualified plans to provide for division of assets to satisfy a domestic relations order, similar to the QDRO rules applicable to ERISA plans. Additionally, many nonqualified plans also provide that benefits can be reduced to satisfy any personal indebtedness of the employee to the employer. Generally, however, third-party creditor claims other than those arising through domestic relations orders cannot be satisfied by attaching an employee’s interest in a nonqualified deferred compensation plan.

An executive with a nonqualified deferred compensation plan balance may thus prefer that benefits remain unpaid until a future date for asset protection purposes. Once the benefits are paid to the employee, they become subject to the claims of creditors and do not qualify for rollover to an IRA or other protected vehicle. Depending on the design of the plan, it may be possible for a participant in a nonqualified plan who is due to take a distribution at some specific date to postpone the distribution five years or longer into future (it is generally prohibited under section 409A of the Internal Revenue Code to postpone a scheduled distribution for a period of less than five years).

Every nonqualified plan is different, so review the applicable plan documents to determine to what extent assets are protected from claims of creditors, and also whether “redeferral” elections are permitted in order to strategically postpone a distribution for asset protection purposes.

IV.       State Government Retirement Benefits

Employees of a state government or affiliated institution such as a state college or university may be eligible to participate in plans unavailable to employees of private sector employers, such as 457 plans state retirement systems. Plans sponsored by a governmental entity are exempt from most parts of ERISA, so the protections that generally apply to ERISA plans do not apply to all governmental plans on the same terms. Under federal bankruptcy law, however, benefits provided under a qualified plan or a governmental 457 or 403(b) plan are treated as exempt to the same extent as assets under an ERISA plan.

With respect to state retirement systems, state law will dictate to what extent these assets are protected from creditors. Under Virginia law, benefits accrued under the Virginia Retirement System (VRS) or its related plans, such as the Optional Retirement Plans, are generally protected from the claims of creditors, with three exceptions:

             1.         Process to recover debt to any employer who has employed the individual;

             2.         Administrative actions or court orders to enforce child or spousal support payment obligations; and

             3.         Division of retirement assets to the extent they constitute marital property for purposes of state law.

These protections are weaker than those applicable to ERISA plans and even IRAs in two respects. First, benefits accrued under the VRS plans are subject to the claims of employers, while ERISA plans and IRAs are protected against the claims of employers to the same extent as the claims of other third-party creditors. Second, benefits accrued under the VRS plans are subject to a wider range of enforcement actions to collect child or spousal support or to divide marital property than are ERISA plans, since Virginia law allows administrative actions to collect VRS assets even without a court order as would be required with respect to an ERISA plan.

Residents of Virginia who are eligible for a distribution from the VRS or an ORP should generally prefer to roll the distribution into an IRA (to the extent that the distribution is eligible for rollover) as soon as possible rather than leaving the assets in the state plan. The asset protection rules applicable to IRAs under current Virginia law are stronger than those applicable to the VRS plans. However, as noted above, any decision to roll assets into an IRA should be considered carefully if relocation to another state is anticipated in the future. —Shad C. Fagerland

Friday, May 4, 2012

Asset Protection – Part 1

How safe are the assets in your retirement account? Imagine the following scenarios:

 1.  You are in a car accident that results in a serious injury. Your insurance coverage is insufficient, leaving you with personal liability in the amount of $250,000. You have $200,000 in a 401(k) account, $50,000 in an IRA, and $25,000 in net assets outside these accounts. Can the injured party collect the judgment by attaching the assets in your 401(k) plan? How about your IRA?

 2.  After losing your job, you find yourself over $50,000 in debt and begin to consider filing for personal bankruptcy protection. Your most significant asset is $25,000 in an IRA that originated as a rollover from your former employer’s profit sharing plan. Are you required to count the assets in your IRA when determining whether you can file bankruptcy? Will you be required to apply the IRA assets to pay off part of your debt? 

3.  You recently switched jobs and have $75,000 in an account under your former employer’s 403(b) plan. You are not thrilled with the investment options available under the 403(b) plan and would like to roll the account over into an IRA; however, you are concerned about a pending legal judgment and want to make sure that these assets will be protected against your creditors to the maximum extent possible. Should you keep the assets in the 403(b) plan or roll them into an IRA?

Asset protection is an important retirement planning consideration that is often overlooked. When considering where to place your retirement savings, keep in mind that different savings vehicles may leave your assets more exposed to the claims of creditors than others. This article outlines the basic asset protection rules applicable to ERISA plans, IRAs, nonqualified deferred compensation plans, and other common retirement savings vehicles.

I.  ERISA Plans

 Assets held in a qualified retirement plan sponsored by an employer or former employer (including 401(k) plans, profit-sharing plans, defined benefit pension plans, and ESOPs, among other types of plans) are covered by the Employee Retirement Income Security Act of 1974 (“ERISA”), a federal law that mandates a strong level of protection for retirement savings. ERISA also applies to certain 403(b) plans offered by non-profit or governmental employers. As a general rule, ERISA plans offer the most solid protection that is available under the law.

ERISA (as well as the parallel sections of the U.S. Tax Code) protects plan assets in several ways. First, ERISA requires that assets held in an employer’s retirement plan must be used for the “exclusive purpose” of providing benefits to plan participants and beneficiaries. ERISA also contains an “anti-alienation” rule prohibiting a plan from assigning plan benefits to any person other than the plan participant or beneficiary, and also from allowing any attachment, garnishment, or other forms of legal process against plan assets. What this means as a practical matter is that the plan is prohibited from paying the amount credited to a participant’s account to anyone but the participant. If a creditor contacted the plan administrator seeking to collect on a personal debt, the plan administrator would be required by law (and by the terms of the plan) to deny the claim.

As an additional layer of protection, ERISA plans are protected against claims under competing state laws. ERISA contains a broad preemption clause providing that ERISA supersedes any state law to the extent that the law “relates to” an employee benefit plan, meaning that ERISA’s protections (such as the anti-alienation rule) can be used to defend against collection actions in any U.S. jurisdiction.

The major exception to the exclusive benefit and anti-alienation rules is Qualified Domestic Relations Orders (“QDROs”), which pertain to the collection of court-ordered alimony, child support, or property division payments. If a plan participant is ordered to use assets from an ERISA plan in connection with a QDRO, the plan administrator can divert the assets in the plan account as required by the order without first obtaining the participant’s consent.

With respect to bankruptcy, assets held in an ERISA plan are treated as exempt for purposes of federal bankruptcy law (but may not be treated as exempt in all states, so make sure to do your homework to understand the bankruptcy laws applicable to the state where you reside or file for bankruptcy protection). This means that assets held in an ERISA plan are not counted as assets that must be used to pay off creditors under the federal bankruptcy rules, and the debtor is thus allowed to retain these assets after going through bankruptcy. Under Virginia law, assets held in an ERISA plan are also treated as fully exempt to the same extent as provided under Federal law. (Prior to 2007, however, Virginia law only exempted ERISA plan assets up to a certain level – a reminder that state bankruptcy laws can differ from federal laws in important ways, and can also be subject to change.)

II.        Individual Retirement Accounts (IRAs)

Assets held in an IRA or Roth IRA are not covered by ERISA, and thus do not qualify for the heightened protection of the exclusive benefit rule, anti-alienation rule, or ERISA preemption. This result applies regardless of whether the assets originated as contributions to the IRA or as a rollover from another IRA or ERISA plan. One implication of a decision to roll assets out of an ERISA plan and into an IRA is thus that the rollover may leave the assets more exposed to the claims of creditors than otherwise would have been the case.

Assets held in an IRA are generally subject to state law asset protection rules, which can vary widely from state to state. Many states, including Virginia, exempt assets held in an IRA from the claims of creditors to the same extent as assets held in an ERISA plan. (Prior to 2007, IRA assets were not treated as exempt under Virginia law if the debtor also held assets in an ERISA plan.) However, this is not universally the case. In some states, IRA assets are only partially exempt from the claims of creditors, and in others IRA assets are not exempt at all.

Federal bankruptcy law exempts assets held in an IRA to the same extent as assets held in an ERISA plan. Residents of a state that does not fully exempt IRA assets for purposes of state bankruptcy law may thus prefer to apply federal exemptions if allowed.

The major point to consider when deciding whether or not to roll assets from an ERISA plan into an IRA is that IRA assets will not be protected equally in all locations. If you currently reside in a state, like Virginia, that treats IRAs the same as ERISA plans for asset protection purposes, you may feel comfortable making the rollover. However, if you ever relocate in the future, you may move into a jurisdiction that leaves the IRA assets more exposed to creditors. General information about the bankruptcy and asset protection rules applicable in different states can be found online at sites such as Legal Consumer.com (http://www.legalconsumer.com/), but it is always best to seek the advice of counsel licensed to practice law in the state in question. 
Shad C. Fagerland

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