Are my Retirement Assets Safe from my Creditors?
By Craig Weinberg
Like many things in the law, it depends.
Colorado permits individuals to exempt certain property from garnishment or collection. In most cases, the law permits an individual to retain those exempt assets rather than lose them to a creditor. As relevant here, the Colorado statute exempts:
“[p]roperty, including funds, held in or payable from any pension or retirement plan or deferred compensation plan, including those in which the debtor has received benefits or payments, has the present right to receive benefits or payments, or has the right to receive benefits or payments in the future and including pensions or plans which qualify under the federal ‘Employee Retirement Income Security Act of 1974,’ as amended, as an employee pension benefit plan, as defined in 29 U.S.C. sec. 1002, any individual retirement account, as defined in 26 U.S.C. sec. 408, any Roth individual retirement account, as defined in 26 U.S.C. sec. 408A, and any plan, as defined in 26 U.S.C. sec. 401, and as these plans may be amended from time to time.” §13-54-102(1), C.R.S.
“The historical purpose behind Colorado’s statutory exemptions is to preserve the debtor’s means of support. Smith v. Pueblo Mercantile & Credit Ass’n, 82 Colo. 364, 260 P. 109, 111 (1927). To effectuate this purpose, courts liberally construe exemptions in favor of debtors. See Colo. Const. art. XVIII, § 1 (“The general assembly shall pass liberal homestead and exemption laws.”); Sandberg v. Borstadt, 48 Colo. 96, 109 P. 419, 421 (1910) (“Primarily, the exemption laws of the state are for the benefit of residents, and they are to be liberally construed.”); see also In re Larson, 260 B.R. 174, 193 (Bankr.D.Colo.2001) (“[T]his Court notes the long-standing tradition in the courts of Colorado to construe all exemptions laws liberally in favor of debtors.”). But courts cannot invoke the principle of liberal construction to alter the plain meaning of a statute [citation omitted].” Roup v. Commercial Research, LLC, 2015 CO 38, ¶ 10, 349 P.3d 273, 276, cert. denied sub nom. Roup v. Commercial Research, LLC., 136 S. Ct. 797, 193 L. Ed. 2d 723 (2016).
In order to determine whether the particular asset is protected under Colorado’s exemption statute, a Court would need to determine three things: First, is the asset a pension or “retirement plan” within the meaning of the statute? Second, is the creditor a former spouse seeking to enforce an award made in a dissolution of marriage proceeding? Third, is the retirement plan an employer sponsored plan covered under federal law?
IS THE PLAN A “RETIREMENT PLAN?”
The Colorado Supreme Court has decided that “the meaning of ‘retirement plan’ in section 13–54–102(1)(s) is unambiguous and can be resolved with reasonable certainty.” Roup v. Commercial Research, LLC, 2015 CO 38, ¶ 14, 349 P.3d 273, 277, cert. denied sub nom. Roup v. Commercial Research, LLC., 136 S. Ct. 797, 193 L. Ed. 2d 723 (2016).
The Colorado Court of Appeals interpreted the meaning of “retirement plan” within the scope of §13–54–102(1)(s) in Dillabaugh v. Ellerton, 259 P.3d 550 (Colo. App. 2011). The Court reviewed three definitions of that term:
A “retirement plan” is “a systematic arrangement established by an employer for guaranteeing an income to employees upon retirement according to definitely established rules with or without employee contributions.A “retirement plan” is “[a]n employee benefit plan—such as a pension plan or Keogh plan—provided by an employer (or a self-employed person) for an employee’s retirement.” Black’s Law Dictionary 603 (9th ed. 2009). In turn, an “employee benefit plan” is “[a] written stock-purchase, savings, option, bonus, stock-appreciation, profit-sharing, thrift, incentive, pension, or similar plan solely for employees, officers and advisors of a company.” Id. at 602.
iii. The General Assembly defined “retirement plan” as “a plan or account created by an employer, the principal, or another individual to provide retirement benefits or deferred compensation of which the principal is a participant, beneficiary, or owner, including [various enumerated plans or accounts under the Internal Revenue Code].” § 15–14–738(1), C.R.S. (2014).
See Dillabaugh, 259 P.3d at 552–53.
Drawing from relevant case law, common dictionary definitions, and the statutory context, the Colorado Supreme Court determined that the plain and ordinary meaning of a “retirement plan” excludes a “health savings account.” Roup, supra. A health savings account (HSA) is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a high-deductible health plan. Generally, the funds contributed to an HSA are not subject to federal income tax at the time of deposit. Since an HSA is not intended to provide income after retirement; it is intended to cover medical costs incurred at any point during an individual’s lifetime, the Colorado Supreme Court has ruled that such an account is not a “retirement plan” and is not, therefore, exempt from collection by a creditor. Roup v. Commercial Research, LLC, 2015 CO 38, 349 P.3d 273, cert. denied sub nom. Roup v. Commercial Research, LLC., 136 S. Ct. 797, 193 L. Ed. 2d 723 (2016).
In most cases, however, the issue of whether a plan constitutes a “retirement plan” within the meaning of Colorado’s statute will be self-evident.
FEDERAL PREEMPTION OF COLORADO’S EXEMPTION STATUTE
A more challenging situation arises when the creditor seeking to collect against retirement plans is a former spouse. In In re Marriage of Drexler & Bruce, 2013 COA 43, 315 P.3d 179, the husband was ordered to pay his ex-wife $5,000 per month in child support and $12,000 per month as maintenance. The husband failed to comply with the order and, as a result, arrearage in the amount of $101,486 accrued. The wife thereafter filed a motion for the entry of a qualified domestic relations order (“QDRO”) so that she could collect against the husband’s retirement plan. The husband objected. He claimed that Colorado and federal law prohibited assigning his retirement funds to the wife to satisfy the support arrearages. The trial court disagreed and ordered him to transfer the funds to wife using a QDRO. In re Marriage of Drexler & Bruce, 315 P.3d 179 (Colo. App. 2013). The Court of Appeals affirmed this ruling.
On its face, the husband’s position appears to be correct because a “retirement plan” is fully exempt under Colorado law. § 13-54-102(1)(s), C.R.S. So, why did the husband lose? In short, the Colorado Court of Appeals ruled that Colorado’s exemption statute was preempted by applicable federal law which permitted the use of a QDRO to reach the retirement funds. The Supremacy Clause of the United States Constitution (Article VI, Clause 2) establishes that the Constitution and federal laws made pursuant to it, constitute the supreme law of the land.
Colorado’s statute specifically includes retirement plans which qualify under the federal Employee Retirement Income Security Act of 1974, as amended (“ERISA”). ERISA was enacted to protect private retirement plan participants and their beneficiaries. See 29 U.S.C. § 1001b(b) (2006). Generally, like state law, ERISA prohibits assignment or alienation of retirement plan funds. 29 U.S.C. § 1056(d)(1) (2006). However, ERISA provides that the anti-alienation provisions do not apply to retirement funds that are assigned to a former spouse under a QDRO.
A QDRO is a mechanism created under ERISA to allow a former spouse to receive all or a portion of the benefits owed to a participant under a retirement plan. In re Marriage of Drexler & Bruce, 315 P.3d at 181. A QDRO is defined as a “domestic relations order” that assigns to an alternate payee the right to receive all or a portion of the benefits payable to a participant. 29 U.S.C. § 1056(d)(3)(B)(i) (2006). In turn, a “domestic relations order” is an order made pursuant to a state domestic relations law that concerns the provision of child or spousal support, or marital property rights of a former spouse. 29 U.S.C. § 1056(d)(3)(B)(ii) (2006).
ERISA preempts “any and all State laws insofar as they may now or hereafter relate to any employee benefit plan” covered by ERISA. 29 U.S.C. § 1144(a) (2006). ERISA further provides an exception to preemption specifically for qualified domestic relations orders (“QDROs”). See 29 U.S.C. § 1144(b)(7) (2006); In re Marriage of Drexler & Bruce, 315 P.3d 179, 183. “Under this provision, state courts are not preempted from issuing QDROs to transfer retirement benefits that are held in plans governed by ERISA.” In re Marriage of Drexler & Bruce, 315 P.3d at 181.
In light of this, the Colorado Court of Appeals has ruled that § 13-54-102(1)(s), C.R.S. (the exemption statute for retirement plans) “conflicts with ERISA, and is thus preempted by ERISA, to the extent that it imposes additional limitations, not imposed by ERISA, on a spouse’s right to receive retirement plan funds under a QDRO.” In re Marriage of Drexler & Bruce, 315 P.3d at 183.
It is important to understand that the husband lost because his retirement plan qualified as a plan under ERISA which ultimately preempted Colorado state law on this issue. But, many retirement plans are not technically ERISA plans.
ERISA governs two types of pension plans: defined benefit and defined contribution plans. In general, individual retirement plans fall outside of ERISA, but employer-sponsored IRAs are an exception. Thus, in most cases, an IRA or ROTH IRA should be protected by Colorado’s exemption statute, even from a former spouse’s claim for maintenance arrearages. This would not, however, appear to be true in conjunction with a claim for child support arrearages. As to child support arrearages, Colorado statute expressly denies an exemption in any pension or retirement plan. § 13-54-102(3), C.R.S.
In sum, most of the time, the issue of whether a plan is a “retirement plan” under Colorado’s exemption statute will be clear. In most cases, the Colorado statute will protect all of the funds in the retirement plan from collection by creditors. However, in the case of a former spouse who is seeking to collect child support, the retirement plan should not be exempt. In the case of a former spouse seeking to collect maintenance, it is possible that the spouse may reach the assets in the retirement plan if the retirement plan falls under ERISA. But, where the retirement plan is not governed by ERISA (such as an IRA or Roth IRA), it appears that a former spouse should not be able to reach the IRA or Roth IRA in order to collect for maintenance arrearages.