A civil suit could result in your losing a significant portion of your personal assets. A civil suit is a lawsuit in which a business or individual makes a legal claim against you for financial damages. You do not go to jail over a civil suit, but you may have to pay monetary damages. One asset you may be concerned about losing in a civil suit is your qualified pension plan.
Pension plans are qualified under the Employee Retirement Income Security Act (ERISA). These pension plans cannot be taken away from you if a creditor tries to file a claim against you for money you owe. Provisions in ERISA prevent the pension plan from being transferred or assigned to a third party. The only exception to this rule is a Qualified Domestic Relations Order,or QDRO. A QDRO is an order issued by a judge that overrules the provisions in ERISA, allowing the court to split up your pension assets in the case of divorce proceedings or when alimony or child support is being considered.
Claims Against Your Employer
Not only are your creditors not allowed to make claims against your pension, your employer's creditors can't make claims against your benefits either. The reason your plan benefits are secure is because ERISA establishes a trust account for your pension assets. The contributions to the plan do not actually belong to you or your employer. Instead, they are held in trust for your future benefit. This secures your future retirement benefits and ensures you have at least some money available for your future.
Not all retirement plans are covered. While your pension is safe in a civil suit, you may have other retirement plans that are not protected. Individual Retirement Accounts, also called IRAs, are only protected in the event of bankruptcy and only up to $1 million. If you're sued, the court may find that your pension is not subject to creditors, but that your IRA is.
Your state may not protect IRAs, but it may protect insurance contracts. Annuities and cash value life insurance are protected in many states from creditors. These contracts function similar to retirement accounts but are regulated at the state level instead of at the federal level. Each state determines the protections offered to insurance policies. You should consider investing in an insurance policy if your state provides significant protections for these contracts.
- "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007
- "Life Insurance"; Kenneth Black, Jr., Harold D. Skipper, Jr.; 1994
- Bankruptcy Abuse Prevention and Consumer Protection Act of 2005; 2005
- Creditor Protection for Life Insurance and Annuities; Gideon Rothschild, Daniel S. Rubin
- DOL: What You Should Know About Your Retirement Plan
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