Does Calfornia AB 2837 eliminate 401(k) lawsuit protection?

[ejw93]

I recently read some disturbing news about new California law AB 2837, and that it eliminates ERISA lawsuit protection features of 401k-type accounts. This is concerning for our family because much of our retirement assets are in 401k accounts (I am also a participant in the Federal Thrift Savings Plan).

A summary of how AB 2837 strips away 401k lawsuit protection in California is summarized here:

California Drastically Reduces Creditor Exemptions For Qualified Accounts

It sounds like AB 2837 destroys the 'free' lawsuit protection provided in 4xx-type retirement accounts.

Q: (For a bankruptcy lawyer) Is AB 2837 something to be alarmed about, or is the article a sales pitch for "Whole Life Insurance Products" or Asset Protection Trusts?

I don't like the idea of a judge deciding how much of my 401k savings I'm allowed to access- This sort of defeats the purpose of retirement saving throughout 30+ years in the workforce.

Thanks!

 

[MichaelB]

I can’t read the link (ad blocker) but I did find a couple of links expressing similar fears. They were all promoting “wealth protection” products.

The explanation on this link (here) makes it seem these fears are exaggerated. If anything, it would seems assets that were previously protected continue to be so, and creditors now have more hurdles to pass to collect.

This bill would expand the types of retirement plans exempt from money judgments, as specified, and exempt such property to the extent necessary to provide specified support for, and satisfy tax obligations of, the judgment debtor. The bill would revise the enforcement provisions described above by requiring a judgment creditor to take additional steps to verify a judgment debtor’s address and provide notice of enforcement to a judgment debtor, by requiring a court to order the return of exempt property that has been levied upon, and limiting the time period during which an earnings withholding order may be enforced and the frequency with which such an order may be sought. The bill would require a financial institution to protect from levy cumulatively exempt funds belonging to the debtor and held in multiple accounts. The bill would generally apply these revised enforcement provisions to cases in which the judgment creditor seeks to enforce judgment based on recovery of personal debt described above.

Here’s a link to a summary (here) prepared by a law firm that isn’t selling a wealth protection product. It doesn’t show any concern.

 

[youbet]

I don't like the idea of a judge deciding how much of my 401k savings I'm allowed to access-

I can't find anything in the docs indicating that the judicial system will be determining how much of your 401k savings you'll be allowed to access. Can you point that out?

 

[ejw93]

Here is the original link. The Forbes article indicates that AB 2837 makes the 401k funds accessible in a lawsuit:

Here is a second article that summarizes AB 2837 and the Forbes article:

Of particular concern (Forbes article):

"California residents who had tax-qualified plans will go to bed on New Year's Eve knowing that their tax-qualified plans were fully protected from creditors, but when they wake up on New Year's Day those plans will be barely protected at all."
Specifically,
"What AB 2837 did was to apply the means test of § 704.115(e) to all tax-qualified retirement plans. Thus, tax-qualified retirement plans that were fully-protected before are fully-protected no more. Instead, the California courts will now look at these plans as well to determine how much money the debtor will need in retirement. This is a huge and very negative change for California debtors who have such plans."
And from the second article (bullet #3):

3. Retirement Account Vulnerability: Previously exempt from creditor judgments, tax-qualified plans such as 403(b), 414, and 457 accounts will now face scrutiny. Courts will decide how much money should be reserved for the debtor’s retirement, limiting the once-automatic protection of these accounts.

 

[ncbill]

I recently read some disturbing news about new California law AB 2837, and that it eliminates ERISA lawsuit protection features of 401k-type accounts. This is concerning for our family because much of our retirement assets are in 401k accounts (I am also a participant in the Federal Thrift Savings Plan).

A summary of how AB 2837 strips away 401k lawsuit protection in California is summarized here:

California Drastically Reduces Creditor Exemptions For Qualified Accounts

It sounds like AB 2837 destroys the 'free' lawsuit protection provided in 4xx-type retirement accounts.

Q: (For a bankruptcy lawyer) Is AB 2837 something to be alarmed about, or is the article a sales pitch for "Whole Life Insurance Products" or Asset Protection Trusts?

I don't like the idea of a judge deciding how much of my 401k savings I'm allowed to access- This sort of defeats the purpose of retirement saving throughout 30+ years in the workforce.

Thanks!

State law cannot strip federal ERISA protection, so funds still in a 401k are not accessible to creditors.

As we've previously discussed here, a rollover from a plan that enjoys ERISA protection retains that same protection under federal law simply by rolling it over into a separate IRA account, and not adding any new money to that rollover IRA.

The Forbes article notes if you have a dischargeable judgment against you & are depending on distributions from a qualified retirement account to live on in retirement you need to plan on filing bankruptcy in federal court to discharge that judgment.

Before taking distributions from any federally-protected account to a taxable account.

Since the latter is what is vulnerable to creditors if you still have an outstanding civil judgment against you.

 

[aja8888]

Wow! That sucks! Hope it doesn't spread to other states.

 

[Texas Proud]

I have not read anything except here... but I think they are protected assets...

Reading the post above it 'seems' like a final judgement prior to this law could not look at how much you had in these account when making a decision of how much OTHER assets they could take... so they would leave you some assets to live on...

But now they can LOOK at that money and say 'hey, you got plenty so we can take ALL of your other unprotected assets'...

I could be WAY wrong...

 

[skipro33]

Would a pension be considered a retirement plan under this law?
Would the company who has 401, 457 plans have those plans exposed to judgement if they went bankrupt and a judge is involved with the company assets for distribution? I've heard that those plans are technically not the employees until they are in their possession and until then could still be considered a company's asset.

 

[meleana]

State law cannot strip federal ERISA protection, so funds still in a 401k are not accessible to creditors.

As we've previously discussed here, a rollover from a plan that enjoys ERISA protection retains that same protection under federal law simply by rolling it over into a separate IRA account, and not adding any new money to that rollover IRA.

The Forbes article notes if you have a dischargeable judgment against you & are depending on distributions from a qualified retirement account to live on in retirement you need to plan on filing bankruptcy in federal court to discharge that judgment.

Before taking distributions from any federally-protected account to a taxable account.

Since the latter is what is vulnerable to creditors if you still have an outstanding civil judgment against you.

I’m not in California, but my husband’s pension was rolled over into an IRA 5 years ago and last month we also rolled over his 401k into that same IRA into the money market sweep account.

We have all the documentation. Our mutual fund company said we could do this and it would be protected.