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					   PROTECTION OF RETIREMENT PLAN ASSETS
                                by Gerald W. Ostarch


           Corpus Christi, Texas                            McAllen, Texas
        Saturday, October 15, 2005                    Saturday, November 5, 2005
               Ortiz Center                                 Embassy Suites

                Gary, Thomasson, Hall & Marks Professional Corporation
                          615 N. Upper Broadway, Suite 800
                           Corpus Christi, TX 78477-0033
                                   361/884-1961
                                  www.gthm.com




Gerald W. Ostarch, LL.B. is a shareholder in, and Executive Officer of, Gary,
Thomasson, Hall & Marks Professional Corporation. Mr. Ostarch provides general
advice and specialized tax advice to physician clients, including matters pertaining to
medical practice entities, retirement plans, and wills and estate planning.

Mr. Ostarch is Board Certified in Tax Law by the Texas Board of Legal Specialization,
and is a former chairperson of the Taxation Section of the State Bar of Texas. He is a
frequent speaker at seminars and has authored numerous tax articles.

This article was prepared to provide general information on the seminar topic presented.
It is provided with the understanding that the author is not rendering any legal or
professional services. This article is not a substitute for legal advice. Any application of
the information contained herein to particular facts or circumstances should be made by
legal counsel.
                 2005 Retirement Plan Contribution Levels
                                                            Code
                  IRS Dollar Limits                                           2005
                                                           Section
     Defined benefit plan annual benefit limit          § 415(b)(1)(A)       $170,000
     Defined contribution plan annual addition
                                                        § 415(c)(1)(A)        $42,000
     limit
     Maximum 401(k) deferral                             § 402(g)(1)          $14,000
     Maximum 401(k) catch-up deferral
                                                      § 414(v)(2)(B)(8)        $4,000
     (at least age 50)
     Maximum SIMPLE deferral                            § 408(p)(2)(E)        $10,000
     Maximum § 457 deferral                          § 457(e)(15) & (e)(1)    $14,000
     Annual compensation limit                       § 401(a)(17) & 404(l)   $210,000
     IRAs and Roth IRAs                                                        $4,000
     IRA and Roth Catch-up Contribution
                                                                                $500
     (at least age 50)


Protection Before 2005:

A.   Qualified Plans (Pension, Profit Sharing, 401(k))

     1.     Outside of Bankruptcy:
            a)      § 206(d)(1) of ERISA (Federal Spendthrift Clause)

            b)      Texas Property Code -- Article 42.0021

     2.     In Bankruptcy:
           a)      U.S. Supreme Court case, Patterson v. Shumate, (1992), relying on
     § 206(d)(1) of ERISA

          b)      § 522(b)(2) [now § 522(b)(3)] Bankruptcy Code, relying on state
     exemptions (i.e., Article 42.0021 of Texas Property Code)



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B.    IRAs (including Roth):

      1.      Outside of Bankruptcy:
              a)    In Texas, Article 42.0021 of Texas Property Code

              b)    Other States, other state law, but perhaps not protected

      2.      In Bankruptcy:
            a)    In Texas, state exemption (i.e., Article 42.0021 of Texas Property
      Code and § 522(b) (2) [now § 522(b)(3)] of Bankruptcy Code – allowing state
      exemptions

            b)      Outside Texas – previously not protected under § 522(b) (2) [now
      § 522(b)(3)] of Bankruptcy Code, if not protected under that state’s law


Significant 2005 Developments:

A.    IRAs in a Bankruptcy Situation
       1.      In April 2005, the U.S. Supreme Court determined that IRA protection is
encompassed by § 522(d)(10((E) of the Bankruptcy Code, with the result that IRA assets
were determined to be partially exempt from claims of the IRA participant’s creditors
(“to the extent reasonably necessary for the support of the debtor and any dependent of
the debtor.”) [Rousey v. Jacoway].

      Notes
             (i)    For states that did not have existing state laws protecting IRA assets,
      the Jacoway decision was significant because it provided a basis under federal law
      for protecting a “reasonable” portion of IRA assets. Thus, in those states,
      bankruptcy appeared to provide more protection than being outside bankruptcy.

             (ii)   Although the Jacoway case dealt only with a rollover IRA (pension
      assets rolled over into an IRA), its reasoning may have conferred similar limited
      protection to assets in an original IRA or in a Roth IRA.




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             (iii) For Texas IRA owners, the result in Jacoway was less significant
      because Texas law already purported to provide more protection to IRAs (original,
      rollover, or Roth ones) – possibly protecting all assets in the IRA.

       2.     The Jacoway decision, and State law on IRA protection, appear to be
“trumped” by the Bankruptcy Abuse Prevention and Consumer Protection Act of
2005 (“Bankruptcy Act”), enacted April 20, 2005. New § 522(h) of the Bankruptcy Act
protects original IRA assets and Roth IRA assets to the extent of $1,000,000, “except that
such amount may be increased if the interests of justice so require.”

      Notes
             (i)    If spouses each have their own IRAs, this $1,000,000 limitation may
      apply separately to each one of them.

             (ii)  Very significantly, this $1 million limitation does not apply to
      rollover IRAs.

              Example: A participant in a 401(k) plan separates from service and rolls
              his/her assets over into an IRA.

              Thus, in a rollover IRA situation, it is very important not to commingle
              annual recurring contributions with rolled-over assets.

            (iii) Although IRAs are used as funding vehicles in connection with
      SEPs and SIMPLEs, the $1 million limitation does not apply to these.

              (iv) The $1 million limitation appears to apply only to bankruptcy cases
      “filed by a debtor.” Therefore, if a debtor is involuntarily thrown into bankruptcy
      by a creditor, his/her IRA may be fully protected even if it exceeds $1 million in
      value -- at this early stage, we do not have a judicial interpretation confirming this
      result, however.

B. Qualified Plans (401(k), pension, profit sharing), SEPs,
SIMPLEs, 403(b) tax sheltered annuities sponsored by public
schools or 501(c)(3) tax-exempt entities, and deferred compensation
plans of governmental entities and tax-exempt entities.
             1.    Section 522(b)(3)(C) of the Bankruptcy Act expressly protects these.
      Also, §§ 522(b)(4)(C) and (D) expressly protect rollovers between such plans.



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       2.    Cautionary Note: Under the Bankruptcy Act and under
§ 42.0021 of the Texas Property Code, protection is predicated, and therefore
dependent, on the plan’s compliance with applicable federal tax requirements.

      Example: If a retirement plan is tax-disqualified by the IRS due to
      operational irregularities, or due to failure to timely update the plan
      document, in addition to adverse tax consequences, this could also make
      plan assets reachable by creditors of a plan participant, including judgment
      creditors.




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PERSONAL PROPERTY                                                                                  § 42.0021
Ch. 42
§ 42.0021. Additional Exemption For Retirement Plan.
          (a)     In addition to the exemption prescribed by Section 42.001, a person's right to the assets
held in or to receive payments, whether vested or not, under any stock bonus, pension, profit-sharing, or
similar plan, including a retirement plan for self-employed individuals, and under any annuity or similar
contract purchased with assets distributed from that type of plan, and under any retirement annuity or
account described by Section 403(b) or 408A of the Internal Revenue Code of 1986, and under any
individual retirement account or any individual retirement annuity, including a simplified employee pension
plan, is exempt from attachment, execution, and seizure for the satisfaction of debts unless the plan,
contract, or account does not qualify under the applicable provisions of the Internal Revenue Code of
1986. A person's right to the assets held in or to receive payments, whether vested or not, under a
government or church plan or contract is also exempt unless the plan or contract does not qualify under
the definition of a government or church plan under the applicable provisions of the federal Employee
Retirement Income Security Act of 1974. If this subsection is held invalid or preempted by federal law in
whole or in part or in certain circumstances, the subsection remains in effect in all other respects to the
maximum extent permitted by law.
         (b)      Contributions to an individual retirement account, other than contributions to a Roth IRA
described in Section 408A, Internal Revenue Code of 1986, or annuity that exceed the amounts
deductible under the applicable provisions of the Internal Revenue Code of 1986 and any accrued
earnings on such contributions are not exempt under this section unless otherwise exempt by law.
Amounts qualifying as nontaxable rollover contributions under Section 402(a)(5), 403(a)(4), 403(b)(8), or
408(d)(3) of the Internal Revenue Code of 1986 before January 1, 1993, are treated as exempt amounts
under Subsection (a). Amounts treated as qualified rollover contributions under Section 408A, Internal
Revenue Code of 1986, are treated as exempt amounts under Subsection (a). In addition, amounts
qualifying as nontaxable rollover contributions under Section 402(c), 402(e)(6), 402(f), 403(a)(4),
403(a)(5), 403(b)(8), 403(b)(10), 408(d)(3), or 408A of the Internal Revenue Code of 1986 on or after
January 1, 1993, are treated as exempt amounts under Subsection (a).
         (c)      Amounts distributed from a plan or contract entitled to the exemption under Subsection
(a) are not subject to seizure for a creditor's claim for 60 days after the date of distribution if the amounts
qualify as a nontaxable rollover contribution under Subsection (b).
         (d)      A participant or beneficiary of a stock bonus, pension, profit-sharing, retirement plan, or
government plan is not prohibited from granting a valid and enforceable security interest in the
participant's or beneficiary's right to the assets held in or to receive payments under the plan to secure a
loan to the participant or beneficiary from the plan, and the right to the assets held in or to receive
payments from the plan is subject to attachment, execution, and seizure for the satisfaction of the security
interest or lien granted by the participant or beneficiary to secure the loan.
         (e)      If Subsection (a) is declared invalid or preempted by federal law, in whole or in part or in
certain circumstances, as applied to a person who has not brought a proceeding under Title 11, United
States Code, the subsection remains in effect, to the maximum extent permitted by law, as to any person
who has filed that type of proceeding.
         (f)      A reference in this section to a specific provision of the Internal Revenue Code of 1986
includes a subsequent amendment of the substance of that provision.
Added by Acts 1987, 70th Leg., ch. 376, § 1, eff. Sept. 1, 1987. Amended by Acts 1989, 71st Leg., ch.
1122, § 1, eff. Sept. 1, 1989; Acts 1995, 74th Leg., ch. 963, § 1, eff. Aug. 28, 1995; Acts 1999, 76th
Leg., ch. 106, § 1, eff. Sept. 1, 1999.




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