Are Term Vested Employee Deferred Benefit Plans Exempt in Bankruptcy?
- Many employers offer employees benefits plans as a component of fringe benefits. Employers pay a specified amount into a plan or fund in the employees' names. Once the employees retire, or pass a vesting period, they can access money from the plans. Most plans are exempt, regardless of if the benefits are deferred or vested.
- Personal bankruptcy law allows filers to declare certain assets exempt from liquidation to pay creditors in Chapter 7 cases or considered as disposable income for payment plans in Chapter 13 cases. Exempt assets are things that courts have deemed necessary for a person to regain financial health and remain independent, and retirement plans fall into the category.
- The Employee Retirement Income Security Act of 1974 established minimum standards, protections and definitions for retirement plans. Most deferred benefit plans--most commonly defined benefit plans and 401(k)s--fall under ERISA's definition. Plans covered by ERISA are exempt up to $1 million adjusted to inflation. Furthermore, ERISA established an insurance fund to maintain pensions and plans for employees of companies that go bankrupt, and prohibited employers from altering funds or cutting pensions set in past years during financial stress, including corporate bankruptcy.
- Lawyer David Levin states that some benefit plans for executives are not exempt in corporate or personal bankruptcy. These plans often provide extra compensation to executives and are not strictly retirement plans; Levin refers to them as "top hat" plans. Furthermore, personal plans or funds worth more than $1million may have any additional money claimed by creditors. If you are worried about your benefit plan, discuss options with a qualified bankruptcy lawyer.