COVID and Your 401(k)

As the one-year anniversary of the COVID-19 pandemic approaches, the financial repercussions continue to escalate. Bankruptcies and lawsuits have skyrocketed. This begs the question, are your retirement accounts, and those of your plan participants, safe from litigation? The answer is not a simple yes or no, it depends on the type of retirement account and what safeguards they possess. Below is a breakdown of the common types of retirement accounts and the protections they afford.

ERISA Plans:

ERISA plans (such as 401(k)s) offer the utmost protection from both bankruptcy and non-bankruptcy claims at the federal level. ERISA plans protect an unlimited balance as well. A special note about solo 401(k) plans however, they are not covered by ERISA and therefore have no non-bankruptcy protection under the ERISA law and will only receive this protection under any applicable state law. Full bankruptcy protection is provided under the bankruptcy code, however. This holds true for other non-ERISA plans as well such as SEP and SIMPLE IRAs and 403(b) and 457(b) governmental plans.

IRAs:

Both Traditional & Roth IRA contributions and earnings are protected under federal law up to a current inflation adjusted cap of $1,362,800. The good news is rollovers from a retirement plan to an IRA does not count towards the cap. As far as non-bankruptcy lawsuits, there is no federal protection for IRAs and protection would therefore be based upon individual state law. Also, monies rolled into an IRA would then be subject to state level protection for non-bankruptcy lawsuits. Monies being rolled over to a new IRA or retirement account will also receive protection as long as bankruptcy paperwork was officially filed while the funds were originally in the account.

Inherited IRAs and Bankruptcy

In a 2014 court decision, it was ruled that inherited IRAs are not protected in bankruptcy under federal law. The court determined that inherited IRAs do not constitute “retirement funds”.

If you have any questions on bankruptcies and their impact on retirement accounts, please contact a Crown Risk Management representative.