The Employee Retirement Income Security Act, or ERISA, is a federal law enacted in 1974 to protect retirement plan assets. ERISA sets minimum requirements that private sector employers must comply with. ERISA governs two types of pension plans: defined benefit and defined contribution plans. In general, individual retirement arrangements fall outside of ERISA's realm, but employer-sponsored IRAs are an exception.
Traditional and Roth IRAs
Most individuals create and maintain IRAs for their personal benefit. They contribute up to the maximum amount in any given tax year. The contribution to a traditional IRA may or may not be fully deductible depending on the contributor's income and whether or not he is covered by an employer-sponsored retirement plan. Since these plans are initiated and governed by the individual and not his employer, these traditional and Roth IRAs are not ERISA qualified. Roth IRAs provide individuals with the opportunity to contribute post-tax income to an account which will allow tax-free withdrawal as soon as the account holder reaches the age of 59 1/2.
Some small to mid-sized companies provide retirement plans to their employees via a Simplified Employee Pension plan or SEP. These smaller businesses may sponsor a SEP because it is generally less administratively complex than some alternatives, including 401(k) plans. With an SEP, employers contribute directly to IRA accounts owned by the employees for each and every employee. The employer, not the employee, reaps the tax benefits of the retirement contribution. Therefore, SEP IRAs are ERISA qualified.
Another employer-sponsored plan that involves IRAs is the Savings Incentive Match PLan for Employees or SIMPLE. A SIMPLE IRA plan enables employers to contribute to traditional IRAs established for employees. Employees may also contribute. Small businesses with few employees often prefer SIMPLE IRAs as an initial retirement plan offering, since it is even less complex than the SEP IRA. The Department of Labor and the Federal Court of Appeals delineate SIMPLE IRAs as ERISA qualified due to the employer's involvement.
Rollovers from ERISA plans
IRAs that employees establish to hold retirement assets rolled over from ERISA plans including 401(k) plans are also ERISA qualified. To ensure that the rollover maintains the ERISA qualified status, the IRA account holder must ensure that he does not commingle non-ERISA funds in the same account.
ERISA and Creditors
ERISA qualified retirement plans enjoy a higher level of creditor protection than non-ERISA plans. Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, IRA accounts are protected up to more than $1 million. However, outside of bankruptcy where BAPCPA does not apply, IRA accounts are subject to the applicable state law. Fortunately, in general the entire amount of ERISA qualified IRA accounts are fully shielded from creditors.
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