In a unanimous decision, the United States Supreme Court recently reversed the Eighth Circuit Court of Appeals and held that debtors can exempt IRAs from the bankruptcy estate under section 522 (d)(10)(E) of the Bankruptcy Code. This decision now settles a division among the Courts of Appeal concerning the exemption of IRAs in bankruptcy cases.

By way of factual background, several years after debtors deposited distributions from their pension plans into IRAs, the debtors filed a joint bankruptcy petition under chapter 7. The debtors sought to exempt a portion of their IRAs by virtue of section 522 (d)(10)(E) which provides, inter alia, that a debtor may withdraw from his estate his “right to receive…a payment under a stock bonus, pension, profitsharing, annuity, or similar plan or contract on account of …age.”

The bankruptcy trustee objected to the exemption and moved for the turnover of the IRAs to the estate. The Bankruptcy Court granted the trustee’s motion and the Bankruptcy Appellate Panel agreed. The Eighth Circuit Court of Appeals affirmed the decision in favor of the trustee, concluding that even if the IRAs were “similar plans or contracts” to those set forth in the statute, payment under the IRAs was not “on account of age.” Agreeing with the trustee’s reasoning concerning the age issue, the Eighth Circuit held that because the accounts were readily accessible to the debtors (even though restricted by a 10% penalty if withdrawals were made before age 59), the requirements of section 522 (d)(10)(E) were not met.

The Supreme Court vigorously disagreed, and held that the IRA distributions were made “on account of age” because the right to receive these payments was restricted by a “substantial” penalty, namely the 10% penalty. Because this restriction is removed once the debtors turn 59, the debtors’ right to be paid the balance in their IRAs is “on account of age.” Finally, the Supreme Court conclusively determined that IRAs are similar to the listed plans in section 522 (d)(10(E), because the common feature of all these plans is to provide a substitute for wages, rejecting the argument advanced by the trustee that IRAs were “deferred compensation.”

Written by Sarah Stuppi