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Effect of ERISA on Exemption Status

April 13, 2006

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Retirement funds are legally protected in an asset exemption plan in different ways. When a retirement plan is subject to ERISA (the federal Employee Retirement Income Security Act), its assets will be excluded from a bankruptcy proceeding and a state court proceeding. Most retirement plans are covered by ERISA, although there are a few notable exceptions, such as unprotected IRAs and plans failing to meet eligibility requirements.

The U.S. Supreme Court has specifically ruled that ERISA-qualified retirement plans are not an issue in a bankruptcy proceeding. The assets in such plans are excluded from the filer's bankruptcy estate, rather than exempted. Thus, the small business owner does not have to claim a state or federal exemption to exclude these assets. Moreover, Congress codified this principle in law with bankruptcy reform legislation that took effect on October 17, 2005.

In the past, in a state court proceeding, usually these assets would be expressly exempted by statute. However, this was not the case in all states. Some states offered no protection or limited protection (see the exemptions list for specific state information). The new federal law clearly states that these funds are now excluded.

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