• U.S. Supreme Court Finds Working Owner of a Business Qualifies as Participant in ERISA Pension Plan
  • March 11, 2004 | Author: Margaret R. Bernardin
  • Law Firms: Ford & Harrison LLP - Tampa Office; Ford & Harrison LLP - Orlando Office
  • The U.S. Supreme Court held yesterday that a working owner of a business (in this case the sole shareholder and president of a professional corporation) is a participant in a pension plan covered by ERISA if the plan covers one or more employees other than the business owner and his or her spouse. See Raymond B. Yates, M.D., P.C. Profit Sharing Plan v. Hendon (March 2, 2004). In reaching this decision, the Supreme Court rejected the lower courts' position that a business owner may only rank as an employer and not also as an employee for purposes of ERISA-sheltered plan participation.

    In Yates, Yates was the sole shareholder and president of Raymond B. Yates, P.C. The corporation maintained Raymond B. Yates, M.D., P.C. Profit Sharing Plan, for which Yates was the administrator and trustee. The Plan contained an anti-alienation provision, which stated that except for loans to plan participants, the benefits and interest available under the Plan were not subject to voluntary or involuntary assignment or alienation. Yates borrowed money from the Plan, which he subsequently paid back in two lump sum payments totaling approximately $50,000. Three weeks after he repaid the loan, his creditors filed an involuntary petition of bankruptcy against him under Chapter 7 of the Bankruptcy Code.

    The bankruptcy trustee sought to recover the $50,000 paid to the Plan as a preferential transfer under the Bankruptcy Code. The Bankruptcy Court ruled in favor of the trustee, finding that the loan repayment was a preferential transfer and that Yates could not participate in the Plan as an employee under ERISA and thus could not use ERISA's protections to enforce the restriction on the transfer of his beneficial interest in the Plan. The federal district court affirmed the Bankruptcy Court's ruling. The Sixth Circuit affirmed this determination, holding that because Yates was not a participant in the Plan, he was not protected by the spendthrift provision (the anti-alienation provision) contained in the Plan.

    The Supreme Court agreed to review the case to resolve a split among the federal appeals courts regarding whether a working owner may qualify as a participant in an employee benefit plan covered by ERISA. The Court found that ERISA's text contains multiple indications that Congress intended working owners to qualify as plan participants. The Court noted that Title I of ERISA partially exempts certain plans in which working owners likely participate from ERISA's mandatory provisions. These exemptions would not have been necessary if working owners could not qualify as plan participants in the first place, according to the Court. The Court also held that under ERISA, a working owner may be both an employee entitled to participate in a plan and an employer who established the plan. Based on this determination, the Court sent the case back to the lower court to address the bankruptcy-related issues.

    What Does this Decision Mean for Employers? The Court's interpretation of ERISA's provisions provides greater protection for working owners who participate in pension plans. It also encourages those owners to establish such plans, since they will be protected under ERISA like the other plan participants.