In two separate rulings by the Iowa Supreme Court and the U.S. Bankruptcy Court for the Northern District of Iowa, debtors who have deferred compensation plans through their employer should have less concern about losing the benefit of those plans either inside or outside bankruptcy. Iowa law provides an exemption from attachment by a creditor for any payments made under a “pension, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service.” In a March 2021 decision, the Iowa Supreme Court ruled that a debtor’s payments under a deferred compensation plan met the definition of the Iowa exemption. Under the facts of the case before the Supreme Court, the debtor’s deferred compensation payments were serving as a substitute for wages on account of his age and similar to payments made under a pension plan. The Court repeated and reinforced the long-held concept that exemption laws are to be liberally construed in favor of debtors.
In the second opinion issued in October 2022 by the U.S. Bankruptcy Court for the Northern District of Iowa, the judge ruled that a bankruptcy debtor’s deferred compensation plan through his employer (a city government) was not even property of the bankruptcy estate and didn’t need to be exempted under Iowa’s exemption law. The judge cited earlier decisions ruling that a debtor’s interest in a plan subject to the federal Employee Retirement Income Security Act (ERISA) is not property of the estate. The judge also cited the bankruptcy code’s specific exclusion from property of the estate for wages withheld by an employer for contributions to a deferred compensation plan under section 457 of the Internal Revenue Code. While courts have differed over the extent of this exclusion, the judge ruled that under the facts of the case before him, the entire amount of the debtor’s deferred compensation account was not property of the bankruptcy estate and not available to attachment by the bankruptcy trustee.
These cases show the importance of having a bankruptcy attorney thoroughly review a debtor’s property and available protections before a bankruptcy is filed.
