Retirement > 401(k)s & IRAs
Why O.J. may pay
September 7, 2000: 1:39 p.m. ET

A look at just how protected your pension and 401(k) money is (or isn't)
By Staff Writer Jeanne Sahadi
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NEW YORK (CNNfn) - If O.J. Simpson loses his appeal of a California civil court order to pay more than $30 million to the families of his ex-wife Nicole Brown Simpson and Ron Goldman, his pension money may be something his creditors can target once he has the cash in hand.

They probably will have a hard time getting the money, for a host of reasons, legal experts say. But the case raises interesting questions about how much and under what circumstances your retirement money is protected from lawsuits and bankruptcy proceedings.

Much depends on what types of plans you have, state law and the court's interpretation of that law.

Putting a lock on your money

Money put away in an employer-sponsored retirement plan, such as a 401(k) or defined-benefit pension, is protected from creditors under the Employee Retirement Income Security Act (ERISA).

Keep in mind, ERISA does not protect IRAs, state agency employees' 457 plans and some 403(b) plans. State law determines if and to what extent your money in those retirement vehicles may be fair game for creditors.

graphicERISA, as it is known, contains an "anti-alienation" clause that says in essence a beneficiary of a pension plan - meaning you the employee - may not, with very few exceptions, be separated from or forfeit your rights to your pension money while it is still in the plan.

"It's a pretty blanket protection," said attorney John Woodrum of Heenan, Althens and Role.

That means no matter how defensible a creditor's claim in a lawsuit or in a bankruptcy proceeding, the money is untouchable while it is invested in the plan, said ERISA attorney Ken Robbett of Smith & Downey.

One notable exception to the anti-alienation clause pertains to Qualified Domestic Relations Orders (QDROs), which may be issued when a marriage breaks up. "Pensions are not protected from equitable settlements in a divorce," said John Collins of the Investment Company Institute.

Where funds are vulnerable

Once you start drawing payments from your pension or 401(k), the money is no longer protected by ERISA.

"When I go into pay status, that money is income like any other," said James Delaplane, vice president of retirement policy at the Association of Private Pension and Welfare Plans.

Potentially your creditors may be able to lay claim to it if they win a judgment against you - although under ERISA the plan administrator is only permitted to pay you, not your creditors, directly. But how much, if any, of your pension pay is vulnerable depends on where you live.

graphic"You turn to state law once the cash hits the bank account," said Christopher Celentino, partner with the San Diego, Calif.-based law firm Luce, Forward, Hamilton & Scripps.

The money is no longer considered a pension, but may be subject to other exemptions.

If state law does not specify how much of that money is considered exempt from creditor's claims once you are in pay status, the courts have some latitude to make those decisions.

A look at California law

For instance, Celentino said, "California is pretty liberal in favor of the pensioner and leaves a lot of discretion to the court."

One key factor California judges use to determine how much of your pension payments is considered exempt from creditors' claims is to assess what's "reasonably necessary" for your support and that of your dependents, Celentino said.

That phrase "reasonably necessary" has been interpreted most commonly as a basic subsistence test, but in a few cases judges have interpreted it to mean what's required to support the "lifestyle of the parties," Celentino said.

So what about O.J.?

Should Simpson lose his appeal, money he collects from his retirement plans may be subject to his creditors' claims.

If Simpson still has a residence in California at the time, the judge would have to decide how much of that money he should be allowed to keep and will take into account what other sources of income exist, whether he is employable and what he can make in the marketplace, Celentino said.

But another lawyer familiar with pension laws said that California treats payouts from corporate pension plans such as the one Simpson has with the NFL Players Association more leniently than the retirement plans of the self-employed, such as doctors.

"You don't get into how much you need for support," said Martin Smith, a partner with Los Angeles law firm Sheppard, Mullin, Richter & Hampton. "I think [the Browns and Goldmans are] going to have a difficult time getting to it for that reason."

Of course, the "it" from Simpson's NFL pension alone is not nearly enough to satisfy the claims against him. In a recent interview with NBC's "Today" show, Simpson indicated he is living off a monthly pension check of up to $25,000 before tax. But that amount is more like the full yearly payout from the plan in which players of Simpson's generation are beneficiaries, said Miki Yaras-Davis, the director of benefits at the NFL Players Association. She nevertheless would not comment on the specific amount Simpson is paid.

Past media reports have indicated Simpson has up to $4.1 million in a number of pension and retirement funds, some of which were reportedly set up by financial adviser Leroy "Skip" Taft, who did not return a call for comment.

Attempts to reach lawyers who had been involved with the pension aspect in the civil court case against Simpson and the trustees of some of his retirement plans were also unsuccessful.

Florida, the debtor-friendly state

Simpson's relocation to Florida likely will make it even more difficult for the Goldmans and Browns to claim what is owed them.

That's because Florida offers debtors a great deal of protection, said Miami-based trial attorney Paul Aiello. "Debtors have a lot of rights down here."

In addition to money for basic support, one's home, for instance, is exempt from creditors' claims up to a certain limit. So, potentially, if Simpson devoted a portion of his pension pay to his mortgage as soon as he gets the check, it may remain protected because he is putting it into an exempt property.

On a practical level, that means creditors have to have perfect timing if they hope to get their due. Often, Aiello said, "[The money is] going to be gone or consumed by the time you get there." Then, he added, "the creditor is out of luck."

The bankruptcy alternative

Should Simpson lose his appeal and file for bankruptcy, his creditors also might have a hard time accessing his retirement money, especially if he has a great deal of money remaining in ERISA-protected accounts.

That's because once a debt is discharged in a bankruptcy, "That's it. There is no recourse after that," Robbett said.

The creditors may contest the bankruptcy, however, arguing that their claim is made on the basis of an intentionally wrongful act, something for which a debt might not be cleared, Celentino said.

Even if the court agrees, that doesn't deprive Simpson of the right to claim he is entitled to some or all of the money because it is necessary for his support, but that would have to be determined whenever he begins to receive payouts from a plan, and over time his support needs may change.

"As time goes on they [the creditors] may have different amounts awarded them," Celentino said.

But one thing seems certain, he added. "They will fight tooth and nail for a long time." Back to top


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Pension and Welfare Benefits Administration

1999 state-by-state survey of IRA protection in bankruptcy

Association of Private Pension and Welfare Plans

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