Can 401(k)s be Garnished?

If you are struggling with debt payment, you may be worried that the creditor will garnish your 401(k) money. Usually, a credit may get a court judgement to enforce an order of garnishment against a consumer. The court may allow the creditor to garnish your wages and money held in a bank account. However, does a garnishment order apply to money held in a 401(k)?

The answer is it depends. The money held in a 401(k) plan or other employer-sponsored retirement plan is generally safe from garnishment by commercial creditors such as banks and credit card companies. 401(k) accounts are protected from garnishment under the ERISA act, and the federal government does not allow private creditors to go after the assets held in an ERISA-qualified retirement account. However, the ERISA protection does not apply if you owe back taxes to the federal government; the IRS can seize assets held in a 401(k) to satisfy a federal tax levy.

ERISA Anti-Alienation Clause

One of the important features of the ERISA act is the anti-alienation clause. This provision prevents employers from releasing a participant's 401(k) funds to a creditor when he/she is still working for the employer. The provision also prevents the participant from freely transferring, selling, or giving up their rights to another party. The anti-alienation provision is what prevents creditors from getting access to an ERISA-qualified retirement plan.  If an employer violates this provision and allows a commercial creditor to garnish a participant’s 401(k) funds, the 401(k) plan would be at risk of losing its tax benefits.

401(k) Protection against Commercial Creditors

Assets held in a 401(k) enjoy special legal status and are protected from garnishment by commercial creditors. This protection comes from the Employment Retirement Income Security Act (ERISA) of 1974, which ensures that retirement savings held in qualified retirement plans are off-limits from creditors such as banks.

The act provides that the assets in a 401(k) are legally the property of your employer, and only belong to you when you take a distribution. Therefore, as long as the funds are held in a 401(k) account, the plan administrator cannot release the money to any other party apart from you. This rule remains in place even after you declare bankruptcy.

Once you withdraw the 401(k) retirement savings into your bank account, the protection from commercial creditors no longer holds. If the creditor wins a court judgment, it can garnish your 401(k) distributions to settle the financial obligations.

Are Solo 401(k)s Protected from Garnishment?

If you are a single-person company with a Solo 401(k), you do not enjoy the ERISA protection against creditors as is the case with company-sponsored 401(k)s. Solo 401(k)s are not required to meet ERISA’s compliance requirements, and this means that they do not enjoy federal protection against commercial creditors. Therefore, funds held in a Solo 401(k) may be tapped by creditors to fulfill debt obligations.

Some states have enacted legislation to offer protection to a non-ERISA retirement account such as Solo 401(k)s. If your retirement savings are at risk of garnishment, check with your state to know if such a law exists, and what you can do to protect your retirement savings from creditors.

Can 401(k) Be Garnished for Credit Card Debt?

If you have missed several credit card payments, you might have received threats from the credit card company to garnish your income and retirement savings. Credit card companies are known to issue threats to customers with unpaid balances as a way of enforcing collections. Fortunately, your 401(k) retirement savings are protected under the ERISA act, and the credit card company cannot seize your 401(k).

If the credit card company files a lawsuit to recover the unpaid debts you owe, and the court rules in its favor, the company can garnish your wages, bank accounts, and properties. The court cannot issue an order to garnish any assets in your 401(k) account. However, if you withdraw money from the 401(k) in the form of retirement distribution or 401(k) loan, the credit card company can seize these funds to settle the unpaid debts.

When 401(k) Maybe at Risk of Garnishment

There are certain circumstances when a creditor can still get access to the 401(k) money to fulfill certain financial obligations. Some of these circumstances include:

Federal income tax debts

If you owe money to the federal government in the form of back taxes and penalties, the ERISA protection does not apply. The federal government, through the IRS, can seize your 401(k) money to collect on a court judgment resulting from defaulted taxes or a federal tax levy.

The IRS can also garnish your 401(k) if the court finds you guilty of a federal crime. In addition, if you are found to have committed fraud against the 401(k) plan, you may be forced to withdraw money from your retirement plan to pay fines imposed in a civil or criminal judgment.

However, the IRS can only seize your 401(k) if you are eligible to withdraw money from the retirement plan. If you are not eligible to take a distribution due to plan restrictions or age, the IRS cannot seize your 401(k).

The power to garnish 401(k) to enforce a judgment is only available to the federal government, and not state governments or local authorities. If the state government or local authority wins a court judgment to enforce a collection, you cannot be ordered to withdraw money from your 401(k) to pay the unpaid debts. However, these parties can still garnish your wages, money held in the bank, or any distributions you take from a 401(k).

Alimony and child support

A 401(k) can also be garnished to fulfill family obligations such as child custody and alimony. If you owe child support, the court may order you to withdraw a specific amount of money from your 401(k) to pay child support obligations such as health insurance, education costs, and other childcare expenses.

If you recently divorced, the court allows your former spouse to get a share of your 401(k) retirement savings. The spouse must obtain a Qualified Domestic Relations Order to be added to your 401(k) account as an alternate payee. If you are in arrears in making the required spousal payments, the court may order the plan administrator to direct a specific amount of money from your 401(k) account to the spouse’s account.