Many small-business owners both administer and participate in pension plans covered by the Employee Retirement and Income Security Act (ERISA). But the courts have been split as to whether business owners qualify as participants under ERISA and are entitled to the same legal protections as employees, including protection from creditors in the event of bankruptcy. Now, the U.S. Supreme Court has unanimously ruled working business owners are participants in pension plans in most circumstances.
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Owner/Shareholder Files for Bankruptcy
Dr. Raymond Yates was the sole shareholder and president of his medical practice, a professional corporation in Tennessee. The corporation maintained a profit-sharing plan and Yates administered and was the trustee of it. As ERISA required, the plan included a “spendthrift” clause, which makes participants’ plan assets untouchable by bankruptcy creditors.
Yates filed for Chapter 7 bankruptcy in 1996, shortly after he repaid $50,467 into the retirement plan to cover a loan he took against it. When his creditors sued to obtain those funds, Yates argued he was an employee under the plan, and the money he paid into the plan couldn’t be touched by his creditors because it was protected by the spendthrift clause.
A federal appeal court disagreed, ruling that Yates was an employer, not an employee, and ordered him to turn over the funds.
Owner/Participants Enjoy Dual Status
But the Supreme Court reversed the ruling, finding that working owners of a business can have “dual status” as both the employer who established the plan and as an employee entitled to participate in the plan.
A working owner qualifies as a participant under ERISA, said the court, if the plan covers one or more employees besides the business owner and his or her spouse. The owner is then entitled to the same protections under ERISA as other plan employees are and is governed by ERISA rights and remedies. Because there were always other participants in Yates’s plan other than Yates and his wife, Yates qualified for participant protections.
A Victory for Owner/Participants
There are important advantages to being able to assert participant rights under ERISA, including the ability to protect your assets and offer a benefit to your employees. If you’re a small-business owner with an ERISA-qualified pension plan, you may already qualify for these protections if people other than you and your spouse are plan participants. Now is a good time to have a benefits professional review your pension plans to ensure they are structured to your best advantage.