Both ERISA and the Bankruptcy Code consider the issue of debtor-participant’s interest in certain pension trusts when an action has been undertaken against the bankrupt debtor participant’s estate. Many jurisdictions have offered conflicting views on the handling of the interest. These conflicts create litigious interpretation and choice of law problems and place plan administrators at risk for breach of fiduciary duty depending on jurisdictional interpretation. Paying-out a bankruptcy trustee’s turnover demand could affect the tax qualified status of the pension plan, thereby hurting all plan participants. ERISA’s preemption provision was drafted to create uniformity among the states in interpreting employee benefit plans in an effort to encourage their continued use by employers.

Some courts trust the plain language of the statutes and conclude that the Bankruptcy Code requires exclusion of the interest in pension plans under ERISA’s anti-alienation provision. Courts interpret anti-alienation to include involuntary garnishments actions by third parties, which means that plan administrators would be at risk for breach of fiduciary duty if they turn over interest accrued on the plan to a bankruptcy trustee. The other approaches rely on an interpretation that the Bankruptcy Code and ERISA are in conflict. While one approach allows the interest for distribution to creditors, the other approach relies on state spendthrift laws to decide the issue. The latter two interpretations eviscerate ERISA’s anti-alienation and preemption of state law provisions. Furthermore, these jurisdictional interpretations ignore ERISA’s purpose of protecting retirement benefits so that members do not become wards of the state which also agrees with the modern Bankruptcy Code’s purpose to allow debtors a fresh start.