California Private Retirement Plans

By Robert J. Mintz, J.D., LL.M (taxation)

California allows for the creation of a Private Retirement Plan, which is entirely exempt from judgments and bankruptcy.  California Civil Code Section 704.115. That is, retirement savings plans can be protected under state law, regardless of IRS and ERISA  qualification if certain requirements are satisfied.

According to the cases that have been decided, these plans must be carefully drafted and maintained, but need not cover other employees. Non-qualified plans may allow for annual contributions that substantially exceed those available under the qualified plans or IRAs. No tax deduction are available for non-qualified plan contributions and accordingly, distributions are not subject to tax.

The complete exemption from judgments for amounts in these plans allows funds to be accumulated for retirement with a high degree of certainty. Business owners traditionally face high liability risks in the operation of their business and these liability risks create jeopardy for amounts intended to be saved for retirement.  California, seeking to insure that  retirement savings are available when needed, offers protection of these savings for business owners and employees as a matter of sound public policy.

This exemption from judgment also applies to distributions from the Private Retirement Plan.The funds are protected while in the plan and in retirement, when the proceeds are withdrawn. As long as the funds can be traced to a distribution from the plan, they can be invested in any manner. For example, if you purchase a home or a boat or gold coins or any other asset with the proceeds, those assets are exempt from judgment.

Benefits of a Private Retirement Plan

• California residents are permitted by law to establish Private Retirement Plans which are exempt from creditor claims and judgments.
• All assets in the plan are protected from lawsuits and judgments – even in bankruptcy.
• The contributions to a non-qualified plan are not tax deductible so:

1. No maximum limit on contributions.
2. No requirement for covering other employees.
3. No annual IRS filings.

• A Private Retirement Plan can be used instead of or in addition to an existing qualified retirement plan.

You can maintain plan funds at whatever financial institution you choose, and you can choose to manage all investments.

Setting Up a Private Retirement Plan

A Private Retirement Plan we recently set up for a physician client provides an example of how this works. The client is forty-five years old, married with one child, and earns about $500,000 per year as a member of a local ob/gyn group. His goal was to save as much as he could for retirement in a protected vehicle. A Qualified Plan wasn’t feasible because of limitations on contributions and the cost of covering other employees. He wasn’t sure whether his current income would increase or decrease over time so we established a flexible formula in his plan based on a percentage of his net income over a certain threshold that allowed him to contribute a larger or smaller portion of his surplus cash each year, based on his circumstances at the time. The client hopes to retire at age sixty or earlier, and the plan documents provide that the proceeds can be distributed to him whenever his actual retirement occurs. In these particular circumstances, where the client wanted maximum but flexible contributions in a protected form, without additional employee or administrative costs, the Private Retirement Plan was a good fit with his financial goals. We also considered the fact that for obstetricians, potential malpractice liability continues even after retirement as the statute of limitations is tolled until the patient reaches age eighteen. With continuing liability from an extended term, the ability to withdraw funds at retirement with the proceeds fully protected was an additional benefit of the plan.

Restrictions on Private Retirement Plans

A Private Retirement Plan must be operated strictly for retirement purposes and misuse of the plan will disqualify it as exempt under California law. Because of the substantial benefits provided under the law, clear abuses of these plans as schemes to avoid creditors may be disallowed by the courts. Cases have held that substantial loans from the plan, early withdrawals of plan assets, lack of a documented plan, failure to adhere to the plan agreement, transfers into the plan prior to a bankruptcy filing and similar abuses may be grounds for setting aside the protective features.

Private Retirement Plans must be carefully drafted with a written plan agreement and retirement trust. Qualified plans must follow ERISA and IRS rules. Non-qualified plans should be designed with features similar to a defined benefit or profit-sharing plan with contributions and distributions actuarially determined based on age, retirement date, specified retirement benefits. survivorship benefits and projected earnings.

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