ERISA Coverage Requires Just One Employee

August 23, 2001 ( - A federal appeals court has ruled that qualified plans are covered by ERISA even if all of the participants are part owners of the company and family members - as long as the plan(s) cover at least one 'employee.'

The ruling in Leckey v. Stefano reversed a lower court’s dismissal of the suit, finding that it had misinterpreted the 3rd US Circuit Court of Appeal’s 1996 decision in Matinchek v. John Alden Life Insurance Co.

Foot “Note”

In applying the findings in Matinchek, the lower court apparently focused in on a footnote in that case that said, “This holding applies to all businesses solely owned by immediate family members, regardless of whether the owners are sole proprietors, sole shareholders, or partners.”

That led the district court to conclude that the 3rd Circuit had effectively expanded ERISA’s exclusion of plans covering only sole owners and their spouses to also exclude any plans covering only joint owners who are immediate family members.

Based on that determination, the lower court found no jurisdiction to hear a suit over a pension plan and a profit-sharing plan at family-owned American Carbyde.   That company’s plan participants were just two related co-owners — a man and his stepdaughter.   The lower court held that their relationship made them owners, not employees, for purposes of determining if a plan was covered by ERISA.

Different Issues

However, the appellate court noted its Matinchek decision did not address the issue at hand in the present case – whether ERISA governed an insurance plan covering non-spouse family members who jointly owned a business.   The court also said that the footnote in the earlier case was “merely dictum” and without precedent.

In its opinion, the appellate court said that the proper distinction hinged on whether an owner can be considered an employee.   ERISA’s exclusion says that a sole owner or a married couple who jointly own a company cannot be considered employees – a key element since ERISA only applies to plans that cover employees  

In the suit, Leckey and the estate of Evelyn Knapp challenged distributions made without her consent by William Knapp prior to his death in 1993.    Since the plans required Evelyn Knapp’s consent, the suit alleged that the distributions violated ERISA.