Advisories & Insights

A recent Supreme Court decision provides an incentive for working owners to create plans that will benefit the employer and non-owner employees alike. On March 2, 2004, the United States Supreme Court held that the working owner of a business may qualify as 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, the working owner may participate on equal terms with other plan participants. The working owner then qualifies for the protections and remedies ERISA provides to plan participants.

The Court's ruling encourages working owners to establish pension plans that are of benefit to both employees and employer, since working owners will be protected under ERISA like the other plan participants. In addition, plans such as small medical plans, which are normally not subject to ERISA's protections are now capable of being afforded ERISA's protections.

Facts of the Yates case
Dr. Raymond Yates was the sole shareholder and president of a professional corporation with a profit sharing/pension plan. The plan had four participants, one of which was Yates. Yates borrowed money from the plan at a set interest. He never made a single payment until 1996 when he paid the loan in full. Shortly thereafter, Yates' creditors filed an involuntary bankruptcy petition against him. The creditors asked the bankruptcy court to set aside the repayment (interest included) and give it to the creditors. The bankruptcy court ruled that the loan repayment was a preferential transfer and that Yates could not participate in the plan under ERISA and thus could not use ERISA's protections to enforce the restriction on the transfer of his beneficial interest in the plan.

Yates argued that under ERISA, the interest from the profit sharing/pension plan could not be seized. A federal district court and a Sixth Circuit Court of Appeals panel both affirmed.

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 benefits plan covered by ERISA.

The Yates ruling
The U.S. Supreme Court, in reversing the Sixth Circuit, based its decision upon an analysis of the provisions of ERISA and concluded that "Congress intended working owners to qualify as plan participants" so long as the plan does not only cover sole shareholders and their spouses. The Court 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.