When saving for retirement, many people assume their accounts are fully protected from creditors—but that’s not always the case. If you participate in a SEP (Simplified Employee Pension) or SIMPLE (Savings Incentive Match Plan for Employees) IRA, you may face unexpected vulnerabilities in the event of creditor claims.
Not All Retirement Accounts Offer the Same Protection
While SEP and SIMPLE IRAs are technically considered ERISA retirement plans, they don’t receive the same ironclad federal general creditor protection as other employer-sponsored plans like 401(k)s. In fact, they may fall into a troubling gray area where both federal and state protections are limited—or completely unavailable.
The ERISA Preemption Problem
Here’s where it gets tricky: ERISA (the Employee Retirement Income Security Act of 1974) preempts—or overrides—state laws that relate to ERISA-covered retirement plans. That includes many state creditor protection statutes. So, even if your state has strong laws shielding IRA assets from creditors, those laws might not apply to SEP or SIMPLE IRAs.
In some regions, this gap in protection has already been tested in court. For example, in Lampkins v. Golden, the Sixth Circuit Court of Appeals ruled that a Michigan law exempting SEP IRAs from creditor claims was invalid because it was preempted by ERISA. That decision applies to residents in Kentucky, Michigan, Ohio, and Tennessee, making it clear that SEP IRA assets in those states lack both federal and state-level creditor protection.
What About Other States?
For residents outside of the Sixth Circuit, the situation is less certain. Courts in other jurisdictions may or may not uphold similar interpretations. That legal ambiguity leaves SEP and SIMPLE IRA owners exposed and unsure of whether their retirement savings are truly safe from general creditors.
What You Can Do
If you hold SEP or SIMPLE IRA funds, it’s crucial to:
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Understand your state’s laws and how ERISA might affect them.
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Consult a financial advisor or attorney to assess your risk exposure.
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Consider asset diversification or other retirement vehicles that may offer stronger protections in your state or under federal bankruptcy law.
Final Thoughts
General Creditor protection for retirement accounts is not one-size-fits-all. SEP and SIMPLE IRAs, despite being employer-sponsored, occupy a unique and potentially vulnerable space in the legal landscape. Knowing the limits of their protection can help you make informed decisions and better safeguard your retirement savings.
