In re Baker Case Analysis

In In re Baker, 590 F.3d 1261 (11th Cir. 2009), the Eleventh Circuit held that Florida’s retirement-plan exemption does not require ERISA compliance. The exemption requires that a profit-sharing plan qualify under section 401(a) of the Internal Revenue Code, and Sarah Baker’s Keogh plan had been denied it because she was the plan’s only participant. The Eleventh Circuit reversed.

The court did not hold Baker’s plan exempt. It remanded so the bankruptcy court could decide whether the Keogh plan complied with section 401(a), which covers an employer’s profit-sharing plan and treats a self-employed person as an employee. The decision answers only the ERISA question, and it does so under the statute as the Florida Legislature amended it in 2005.

Baker’s Keogh Plan in the Lower Courts

Sarah Baker was the sole participant in and beneficiary of a Keogh plan that Fidelity Investments managed. Fidelity had obtained IRS letter rulings that the plan was “acceptable under section 401 of the Internal Revenue Code,” but Baker did not contend that the plan complied with ERISA, the federal Employee Retirement Income Security Act of 1974.

She filed a chapter 7 petition and claimed the plan as exempt under section 222.21(2)(a)1 of the Florida Statutes. Robert Tardif, the chapter 7 trustee, objected. Baker answered that the provision exempts profit-sharing plans that qualify under section 401(a) of the Internal Revenue Code and that her Keogh plan qualified.

The bankruptcy court ruled that the plan was property of the estate. It concluded that Baker could not claim the exemption because she was the plan’s “sole shareholder and sole ‘participant,'” and it relied on Raymond B. Yates, M.D., P.C. Profit Sharing Plan v. Hendon, 541 U.S. 1 (2004). The bankruptcy court took that decision’s definition of a pension-plan participant under ERISA as its test. The district court affirmed, ruling that the plan had to be maintained under ERISA for Baker to claim the exemption.

What Section 222.21 Said in 2009 and Says Today

Florida’s retirement-plan exemption, section 222.21(2)(a) of the Florida Statutes, covers a fund or account, and anything payable from it, if the fund or account is maintained under a qualifying plan. The exemption runs against the claims of the owner’s, participant’s, or beneficiary’s creditors. Florida has opted out of the Bankruptcy Code’s exemption list, so a Florida debtor in bankruptcy keeps whatever state law exempts on the petition date.

Subparagraph 1, the provision Baker invoked, covers a fund or account maintained under a master, volume submitter, prototype, or other plan or governing instrument that the IRS has preapproved as tax-exempt. Section 401(a) heads the statute’s list of nine qualifying sections of the Internal Revenue Code. Paragraph (2)(b), added in 2005, says that ERISA coverage is not necessary: the money or interest is exempt whether or not the plan or governing instrument is covered by any part of ERISA.

The text the Eleventh Circuit quoted in 2009 for subparagraph 1 and paragraph (2)(b) reads the same in the statute in force today. The current statute also carries two further routes to the exemption. Subparagraph 2 reaches a fund or account whose plan the IRS has determined to be tax-exempt, and subparagraph 3 lets the claimant prove by a preponderance that the plan substantially complies with the Code’s requirements. Baker addressed only subparagraph 1.

The statute the Florida bankruptcy courts applied before the amendment read differently. It exempted a participant’s or beneficiary’s interest in “a retirement or profit sharing plan that is qualified under” section 401(a) and the other listed Code sections, with no fund-or-account language and nothing saying that ERISA coverage was unnecessary.

Section 401(a) of the Internal Revenue Code is the provision Baker’s plan was said to satisfy. It makes a trust forming part of an employer’s stock bonus, pension, or profit-sharing plan for the exclusive benefit of employees a qualified trust, and section 401(c) counts a self-employed individual as an employee.

Why ERISA Compliance Is Not Required

The Eleventh Circuit disagreed with the district court’s ruling that Baker’s Keogh plan had to be maintained under ERISA to be exempt. The court pointed to the 2005 amendment, under which the Legislature provided that an exempt plan does not have to comply with ERISA, and it quoted paragraph (2)(b).

The court reversed the judgment that the plan had to comply with ERISA to qualify for the exemption. In its words, the provision “requires that a profit-sharing plan qualify under section 401(a) of the Internal Revenue Code, not that the plan comply with the Employee Retirement Income Security Act,” and that sentence is the whole holding.

The opinion does not discuss Yates again. Once the court held that the Florida exemption does not require ERISA compliance, whether Baker was a participant under ERISA’s definition dropped out of the case. The court remanded so the bankruptcy court could address whether the Keogh plan complies with section 401(a).

How Florida Bankruptcy Courts Ruled Before 2005

Before the 2005 amendment, the Middle District of Florida bankruptcy court read Florida’s retirement-plan exemption as requiring an ERISA-qualified plan, and debtors whose plans covered only themselves lost. Chief Judge Alexander Paskay reached that result in three cases.

In In re Harris, 188 B.R. 444 (Bankr. M.D. Fla. 1995), a physician who solely owned his professional association had taken loans exceeding $125,000 from its profit-sharing plan and repaid none. The plan had once covered other employees, but he and his wife lent plan money to themselves and put the assets into undeveloped land without appraisals.

The court found that the plan was not ERISA-qualified because it had been run as a personal bank, so the interest was not excluded from the estate. It then held that ERISA qualification was “a condition precedent” to the Florida exemption, which was therefore unavailable.

In In re Fernandez, 236 B.R. 483 (Bankr. M.D. Fla. 1999), an attorney’s professional association maintained defined-benefit, profit-sharing, and money-purchase plans with favorable IRS letters. The court wrote that it was “now uniformly agreed” that the Florida exemption requires an ERISA-qualified plan. The attorney was the plans’ only participant, he had the defined-benefit plan buy New York land for his own retirement home, and he borrowed $50,000 from it for a residence and did not repay the loan when he sold that house.

The court found that the plans had lost their ERISA qualification for exemption purposes and sustained the objection. It declined to follow a 1999 Labor Department advisory opinion that a working owner can be a participant.

In In re Sutton, 272 B.R. 802 (Bankr. M.D. Fla. 2002), a real-estate sole proprietor held a Charles Schwab prototype Keogh plan backed by a 1986 IRS opinion letter that the form was acceptable under section 401. He was the plan’s only participant, employer, administrator, and beneficiary. The court found the plan was not an ERISA plan and held that the Florida exemption was “limited to monies or assets that are qualified under ERISA,” and it ordered the plan, worth $47,727.86, turned over to the trustee.

Baker’s Keogh plan had the same shape as Sutton’s: a Fidelity-managed plan with IRS letter rulings and a single participant. Under the amended statute, the ERISA objection failed. The Eleventh Circuit’s opinion does not mention these three decisions; the 2005 amendment, rather than an appellate reversal, changed the rule they applied.

What Baker Did Not Decide

Baker’s holding is limited to the ERISA question; the Eleventh Circuit did not decide whether Baker’s plan qualified under section 401(a) and did not hold the plan exempt. Qualification under the listed Code section remains a requirement of the Florida exemption, and that question went back to the bankruptcy court.

The exemption also depends on how the plan is run after it qualifies. The Eleventh Circuit held in In re Yerian, 927 F.3d 1223 (11th Cir. 2019), that a fund or account loses the exemption when its owner does not maintain it under the governing instrument’s terms. The debtor there lost his IRA’s protection because he and his wife took title to cars the IRA owned and he used an IRA-owned condominium himself.

After the two decisions, the Florida exemption asks whether the plan qualifies under the Code and whether it has been run according to its governing instrument, and it does not ask whether ERISA covers it.

ERISA does not preempt the Florida exemption. The Eleventh Circuit held in In re Schlein, 8 F.3d 745 (11th Cir. 1993), that ERISA’s saving clause preserves state exemptions enacted under the Bankruptcy Code’s opt-out authority. A plan that does fall under ERISA has a separate federal shield as well. ERISA requires every pension plan to provide that benefits may not be assigned or alienated, subject to the exceptions the statute itself lists, such as a qualified domestic relations order.

What Baker Means for Owner-Only Plans

An owner-only retirement plan in Florida, such as a solo 401(k) plan or a Keogh plan covering no one but the owner, does not need ERISA coverage to be exempt. It must qualify under a listed Internal Revenue Code section and be maintained on the terms of its governing instrument. The ERISA objection is the one a creditor raises against a sole practitioner or sole proprietor whose plan covers no one else, and before the 2005 amendment it worked in Florida.

Florida protects pension and profit-sharing plans and 401(k) plans under section 222.21 whether or not the plan has non-owner employees, which is the protection a solo plan would otherwise lack outside bankruptcy. IRAs fall outside ERISA altogether, and Florida’s IRA creditor exemption runs through the same statute, which lists section 408 among the qualifying Code sections.

Outside Florida, an owner-only plan’s protection from a judgment creditor depends on the owner’s state law, because ERISA’s anti-alienation rule does not reach a plan that covers no employees. Florida’s statute supplies by its own text what ERISA withholds from those plans, and Baker is the appellate decision that reads the text that way.

Florida’s other exemption decisions include Yerian on how a qualified plan must be run, and the broader Florida asset protection case law shows how federal bankruptcy courts apply the state’s exemptions.