Your Pension in Bankruptcy

With few exceptions, your pension is safe when you file for bankruptcy.

Updated May 20, 2016

With few exceptions, your pension is safe when you file for bankruptcy. The current bankruptcy law contains broad protection for pensions and other retirement plans. The bankruptcy law identifies each type of plan by the Internal Revenue Code (IRC) section which qualifies it for tax treatment as a pension or other retirement plan.  Your plan administrator should be able to provide you with documentation to tell you what section of the Internal Revenue Code your plan is qualified under.

Retirement Plans That Are Not Included in the Bankruptcy (No Exemption Required)

Under the current bankruptcy law, certain retirement plans have been designated as “excluded” from the bankruptcy estate, which means you get to keep them. Because they are not part of the bankruptcy estate, these types of plans do not come under the control of the bankruptcy trustee so there is not, technically, a need to claim them as exempt. However, you still must disclose your interest in these accounts on your bankruptcy schedules and many attorneys choose to list them under your "exempt" property as well. These accounts include:

  • educational Individual Retirement Accounts (IRA) under IRC 530(1)(b), subject to certain limitations
  • pension and retirement plans qualified under the Employee Retirement Income Security Act of 1974 (ERISA)
  • government retirement plans under IRC 414(d)
  • deferred compensation plans under IRC 567, and
  • tax deferred annuity plans under IRC 403(b).

Retirement Plans That Can Be Claimed as Exempt

If a retirement plan is exempt under the exemption system you choose to use, you get to keep it. When you file for bankruptcy, you are required to choose whether you are claiming federal or state exemptions. While the particular set of exemptions you use will determine whether your plan is exempt, most plans will qualify for an exemption under both state and federal exemptions. (To learn more about how exemptions work, which exemptions you may use, and how to find the exemptions in your state, see the articles in our Bankruptcy Exemptions  area.)

When You Are Electing State Exemptions

Many states provide their own exemptions for pensions and other retirement plans, including special protections for state employee retirement plans. You need to check the law in your state for those details. But even when you claim state exemptions, you can claim most pensions and other retirement plans as exempt under the federal bankruptcy law as well. This is still considered electing state exemptions. These exemptions include:

  • qualified pension, profit sharing and stock bonus plans under IRC 401, including employee stock ownership plans
  • qualified annuity plans under IRC 403
  • Individual Retirement Accounts (IRA) under IRC 408, up to a value of $1,283,025
  • Roth IRAs under IRC 408A, up to a value of $1,283,025
  • retirement plans for controlled groups such as churches, partnerships, proprietorships and governments, under IRC 414
  • eligible deferred compensation plans under IRC 457, and
  • retirement plans established and maintained by tax-exempt organizations under IRC 501(a).

When You Are Electing Federal Exemptions

If you are electing federal exemptions or you do not qualify for state exemptions, the exemptions are even more expansive.  In addition to claiming the plans identified above as exempt, you are entitled to claim an exemption for any right to receive payments under any stock bonus, pension, profit sharing, annuity or similar plan or contract on account of illness, disability, age, or length of service to the extent reasonably necessary for your support or the support of your dependants.  Limitations may apply if you were employed by someone close to you, such as a relative, at the time the plan was created.

Retirement Plans That May Not Qualify as Exempt or Excluded

Plans that may not qualify for an exemption include:  

  • Employee Stock Purchase Plans (ESPP)
  • plans that were improperly funded
  • plans that do not qualify as retirement plans under any identified section of the tax code
  • an IRA inherited by someone other than a spouse (this depends on the case law in your area, check with a lawyer)
  • plans that have not received a favorable determination from the Internal Revenue Service and are not in substantial compliance with any of the identified tax code sections, and
  • plan funds that have been rolled-over or transferred into a new fund in a way that is not in compliance with the tax code.

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