Employer retirement plans carry one of the strongest creditor protections in American law. ERISA and the Internal Revenue Code require a qualified plan to prohibit assignment or alienation of benefits. A judgment creditor generally cannot touch your 401(k).
The IRS can, under specific conditions. Understanding those conditions tells you how real the risk is for your plan.
The anti-alienation rule and its tax exception
IRC 401(a)(13) requires a qualified plan to provide that benefits may not be assigned or alienated. Treasury Regulation 1.401(a)-13(b)(1) repeats the requirement: benefits may not be anticipated, assigned, alienated, or subject to attachment, garnishment, levy, execution, or other legal process.
Then 1.401(a)-13(b)(2) carves out two exceptions. A plan's anti-alienation provision does not prevent:
- The enforcement of a federal tax levy made under IRC 6331, or
- Collection by the United States on a judgment resulting from an unpaid tax assessment.
So the IRS can levy a qualified plan without disqualifying it. Combined with IRC 6334(c), which limits exemptions from levy to those listed in 6334(a), the conclusion is straightforward: employer plans are not exempt from IRS levy as a matter of law.
IRM 5.11.6.3 lists the plans covered: qualified pension, profit sharing, and stock bonus plans under ERISA; IRAs; SEP-IRAs and Keoghs; 403(b) plans; and eligible 457(b) plans of governmental employers. Federal employees' Thrift Savings Plan accounts follow a separate statutory rule and are outside the scope of this page.
The same IRS procedure applies
Everything in can the IRS levy your IRA in Florida? applies to employer plans too. Before levying, a Revenue Officer must consider alternatives, find flagrant conduct, and determine whether you depend on the funds for necessary living expenses. The levy must be issued on Form 668-R, Notice of Levy on Retirement Plans, approved by the SB/SE Director, Collection Area.
The limit that matters most: present rights only
Here is the part most people miss. A levy reaches only what you have a right to receive at the time the levy is served. IRM 5.11.6.3 is explicit: a levy reaches your vested present rights under the plan, it does not accelerate payment, and it is enforceable only when you are eligible to receive the benefits. The plan terms decide what your present rights are.
The IRM gives two examples worth knowing.
Example one: vested but not yet payable
You are fully vested in a $10,000 account, but under the plan you cannot take a lump sum until a future date. The levy attaches to your present right to that $10,000, but nothing can be collected until you become entitled to withdraw it. If the account has grown to $30,000 by then, the IRS still collects only $10,000 without a new levy, because that was your right on the date of levy.
Example two: not vested
If you are 0 percent vested in the employer-funded benefit and the plan offers no lump sum, you have no present property right in that benefit, and a levy has nothing to attach to. Your own contributions are always 100 percent vested, so a levy may attach to them, but collection still depends on whether the plan lets you withdraw them.
What this means at different ages
| Where you are | What a levy can usually reach |
|---|---|
| Still working, plan bars in-service withdrawals | Often nothing collectible now; levy may attach to future rights |
| Still working, plan allows in-service withdrawals after 59 and a half | The amount you could withdraw |
| Separated from service, plan allows lump sum | The vested balance |
| Retired and receiving annuity payments | The payment stream as it becomes due |
| Rolled the 401(k) to an IRA | Generally the full IRA balance, since IRAs are usually withdrawable at any time |
Notice the last row. Retirees often roll a 401(k) into an IRA for good reasons: more investment choices, simpler RMDs. But for someone with unresolved IRS debt, moving money from a plan with restrictive withdrawal terms into an IRA can turn an asset the IRS could not practically reach into one it can. That is not a reason never to roll over. It is a reason to resolve the IRS problem first, or at least to know the trade-off.
Plan administrators and the levy
The IRS serves the levy on the plan's custodian or administrator. The IRM tells Revenue Officers to review the plan document, if available, to identify the correct custodian and to determine your rights, and to consult the IRS's Employee Plans function and Counsel when your present rights are unclear. Often the levy is served before your exact rights are determined.
The administrator must withhold federal income tax on the distribution. For an eligible rollover distribution from a qualified plan, IRC 3405(c) requires 20 percent withholding. The IRM gives this illustration: if you owe $10,000 and the plan holds $5,000, the levy proceeds are $4,000 and $1,000 is withheld for income tax.
Taxes on a levied distribution
A levied distribution is taxable income to you in the year paid. The 10 percent additional tax on early distributions does not apply, because IRC 72(t)(2)(A)(vii) excludes distributions made on account of an IRS levy. The plan should report the exception on Form 1099-R, and the IRS sends Letter 3257 to the plan administrator and Letter 3258 to you confirming the 10 percent tax is not due. Hold onto that letter. See the levy exception to the 10% penalty.
Plan loans
Revenue Officers sometimes ask whether you can borrow against your 401(k) to pay the debt. Under IRM 5.8.5.10, when contributions are required as a condition of employment and you cannot withdraw but can borrow, the IRS treats the available loan value as your equity in the plan for offer purposes. A plan loan is not a taxable distribution if it meets the loan rules, but it must be repaid, and an unpaid loan after you leave the job can become a taxable distribution. Borrowing to pay the IRS can make sense for a working taxpayer with a secure job. For a retiree or someone near separation, it usually just moves the problem.
Retirement accounts in bankruptcy
Retirees who have been through bankruptcy should know one more rule from IRM 5.11.6.3. If a notice of federal tax lien was filed before the bankruptcy, the IRS may still levy exempt retirement accounts to collect taxes that were discharged, limited to the account's pre-petition value. For accounts excluded from the bankruptcy estate, the IRS may levy even without a filed lien if the statutory lien arose before the filing. Contributions made after the petition date are not reachable. See does a federal tax lien attach to your IRA or 401(k)?
Wrongful levies
If the IRS levies a plan wrongfully or in violation of its procedures and returns the money, IRC 6343(f) lets you put the returned amount, plus the interest the IRS pays, back into the plan or an IRA without regard to contribution limits, and any resulting income tax is abated if you recontribute by the due date of that year's return.
Next step
If a Revenue Officer is asking for your plan statements or the plan document, the levy analysis has started. That is the time to propose a realistic alternative. Call (813) 229-7100 if you want help. The firm's guide on what to do when you owe the IRS lays out the options.
Questions people ask
Does ERISA protect my 401(k) from the IRS?
No. Treas. Reg. 1.401(a)-13(b)(2) states that a plan's anti-alienation provision does not prevent enforcement of a federal tax levy under IRC 6331.
Can the IRS take my 401(k) if I am still working?
The levy reaches only your present rights under the plan. If the plan does not let you withdraw funds while employed, the IRS generally cannot collect until you become eligible, and then only the amount of your rights on the levy date unless it issues a new levy.
Will rolling my 401(k) to an IRA affect IRS collection?
It can. IRAs are usually withdrawable at any time, so a levy can reach the full balance, while some employer plans restrict withdrawals. Resolve the IRS debt or weigh the trade-off before rolling over.
Is there a penalty if the IRS levies my 401(k) before I am 59 and a half?
Not the 10 percent additional tax. IRC 72(t)(2)(A)(vii) exempts levy distributions. Regular income tax still applies.
General information, not legal advice. Reading this page does not create an attorney-client relationship. Tax rules and dollar thresholds change; confirm the current figures for your tax year before acting.