Can a Judgment Be Filed Against a 401(k)?
- The U.S. Supreme Court has ruled that 401(k) plans are exempt from attachment by creditors in the event that the account owner files for bankruptcy. They are considered exempt assets under ERISA (Employee Retirement Income Security Act of 1974) statutes and are thus provided with an anti-alienation clause that renders them unreachable by creditors. This also applies to individual retirement accounts that are funded by rollovers from 401(k) plans. All other types of qualified plans and 457 plans enjoy this level of protection as well. A 401(k) account owner who has declared bankruptcy can still repay any loan that he have taken from his plan without attachment as well. However, this exemption is capped at $1 million per 401(k) or rollover account per person.
- The laws governing the attachment of 401(k) plans and other qualified plans due to court judgment extend to lawsuits and other non-bankruptcy judgments as well. Qualified retirement plans are protected from any type of judgment or lawsuit, such as a settlement ruling from a car or other type of accident, or payment that is required to satisfy a punitive settlement. Even Solo 401(k) plans are usually exempt from creditors under state law, as this type of plan is technically not covered under the federal statutes due to its singular nature. Creditors do have one caveat that can allow them to attach money from a 401(k) plan: If they can prove that the defendant specifically invested money into the plan in an effort to shield it from creditors. However, this is generally almost impossible to prove, as any contributions that are made into the plan during the legal proceedings will generally be considered to be "normal" contributions if they match the level of contributions that were made before the attachment.
- There are a couple of limitations on the exemption of assets from creditors for 401(k) plans. These plans can be attached by the Internal Revenue Service in order to pay back taxes in the same manner as all other types of assets. Bankruptcy cannot exempt the filer from paying back taxes under any circumstances. The IRS has the authority to seize some of all of the assets in a 401(k) or other qualified plan to satisfy any tax debt.
- The other creditor that 401(k) plans are vulnerable to is divorce. One spouse can be ordered to give a portion of his or her 401(k) plan to the other in a Qualified Domestic Relations Order, or QDRO. The required balance is then transferred out of one spouse's account and retitled in the name of the other spouse or rolled over into an IRA in the name of the other spouse.
