On September 24, 2024, California Governor Gavin Newsom enacted Assembly Bill 2837 (AB 2837), which introduced significant revisions to the California Enforcement of Judgments Law (EJL), particularly affecting tax-qualified retirement plans. These alterations, set to take effect on January 1, 2025, primarily address changes in the creditor protections afforded to various retirement accounts. Prior to this legislation, tax-qualified retirement plans enjoyed a broad immunity from creditor claims, effectively shielding funds from being seized or garnished by creditors. However, AB 2837 transitions the landscape, allowing creditors to potentially access these funds under certain circumstances. This shift in policy marks a critical juncture for individuals relying on these plans for financial security during retirement.
Under the previous framework, tax-qualified retirement plans, including employer-sponsored retirement accounts, were completely exempt from creditor judgment enforcement. This meant that, regardless of the debtor’s financial status, creditors could not touch these funds, providing a powerful safety net for individuals facing financial distress. Distributions from these accounts also enjoyed the same protections, reinforcing the notion that retirement savings would remain intact and available for the debtor’s use in retirement without fear of creditor interference. The established security offered by these provisions allowed many California residents to manage their debts without jeopardizing their retirement nest eggs.
Conversely, certain accounts were not afforded the same level of protection; specifically, Individual Retirement Accounts (IRAs) and Simplified Employee Pension (SEP) plans faced their own challenges. These plans were subject to a means test outlined in CCP § 704.115(e), which assessed the debtor’s financial needs in retirement against their overall income and assets. Consequently, if a debtor had additional retirement assets, the protection for IRAs and SEPs could be significantly reduced or eliminated. This inconsistency created uncertainty, particularly for those with modest savings who were already contending with California’s high cost of living and the harsh realities of retirement planning.
AB 2837’s influence extends to tax-qualified retirement accounts previously shielded from creditor claims. Now, all tax-qualified plans will be subject to similar scrutiny under the means test, which evaluates the necessary income for retirement living. This development presents a critical drawback for California debtors, who now face the potential for their retirement savings to be vulnerable to creditor claims. Despite this, it is important to note that many of these retirement accounts are ERISA plans, which benefit from federal law’s anti-alienation protection, ensuring that funds remain safe for the time being. While the money within these plans continues to have protection against creditors, the situation shifts when distributions occur, effectively leaving individuals more exposed at a vulnerable moment.
The most consequential change resulting from AB 2837 is the alteration of protections surrounding distributions from ERISA plans. Previously secure distributions are no longer fully exempt as they become subject to the same means test that affects other retirement accounts. Consequently, creditors may significantly impact withdrawals from these plans, placing those funds within reach once the debtor receives them. This paradigm forces individuals to consider additional strategies, like bankruptcy, which may afford them greater protection against creditor claims—particularly since bankruptcy offers a structured approach to dealing with dischargeable debts before any potential distribution is made from an ERISA plan.
Amid these changes, there is a slight positive adjustment under AB 2837, allowing for the exclusion of federal and state taxes attributable to retirement plan distributions, thereby reducing the amount creditors can claim. While this protection extends across all tax-qualified plans, it does little to alleviate the overall vulnerability that residents with such plans now face under the updated law. For asset protection planning, professionals will need to reassess their strategies, given the now-heightened risk related to tax-qualified retirement plans, which previously could be counted on as a secure financial reservoir. The law’s implications necessitate a thorough reevaluation of how Californians can safeguard their assets, particularly in the context of rising costs and the pressing need for reliable financial planning in retirement.