You are not alone if you have concerns that your IRA or workplace plan savings could be lost if you are forced to declare bankruptcy or wind up on the losing end of a civil lawsuit. After all, we all count on those savings for a financially secure retirement. Fortunately, there is usually some degree of creditor protection for retirement accounts. Unfortunately, that doesn’t seem to be the case for SEP and SIMPLE IRA plan funds. Those accounts may not always be protected against creditors.
Let’s start with the good news. If you must declare bankruptcy, your SEP and SIMPLE IRA accounts can’t be reached by bankruptcy creditors. That’s because the federal Bankruptcy Code provides a complete shield for those funds. Traditional and Roth IRAs are also protected under the Bankruptcy Code, but that law imposes a dollar limit on the amount of IRA funds that are free from creditors. That dollar limit is indexed every three years based on the cost-of-living. On April 1, 2025, the dollar limit increased from $1,512,350 to $1,711,975, effective through March 31, 2028. Importantly, this dollar limit does not take into account amounts rolled over from employer plans like 401(k)s.
Unfortunately, the news is not as good for SEP and SIMPLE IRAs when non-bankruptcy creditors come after those funds after winning a lawsuit. Many workplace retirement plans are shielded from these creditors because the plans are covered by the federal ERISA law, which usually provides rock-solid protection.
SEP and SIMPLE IRAs are technically considered ERISA retirement plans. So, what’s the problem? The problem is that ERISA denies those plans the complete protection against general creditors that it gives to other employer plans. (The language in ERISA is not crystal-clear, but that’s how courts have interpreted it.)
Some states have their own laws intended to provide a state shield against general creditors trying to reach SEP and SIMPLE IRA accounts. That would seem like another way to protect those monies from non-bankruptcy creditors. But, again, no luck. ERISA has a provision that says, for ERISA-covered plans, any state law that “relates to” ERISA retirement plans is disallowed. (The fancy word is “preempted.”) State creditor protection laws clearly “relate to” SEPs and SIMPLEs, which are ERISA plans.
So, when it comes to non-bankruptcy creditor protection, SEP or SIMPLE IRA owners may be stuck between a rock and a hard place. They do not have federal protection because ERISA has a carve-out for SEP and SIMPLE IRA plans. And they don’t have state protection because state creditor protection laws apparently cannot apply to ERISA plans like SEPs and SIMPLEs. This was exactly the conclusion of a 2002 federal appeals court decision (Lampkins v. Golden) that covered residents of Kentucky, Michigan, Ohio and Tennessee. There haven’t been any similar court decisions covering residents of other states, but those residents also may be out of luck.
What to do? If you have a SEP or SIMPLE IRA and are concerned about creditors, consider moving those funds to an IRA, where you will likely receive at least some state creditor protection. Owners of businesses with SEPs or SIMPLEs who have creditor concerns may want to consider terminating those plans in favor of 401(k)s, where again the funds will likely be better protected.
If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.
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