Supreme Court: Business Owner May Be Plan Participant

March 2, 2004 ( - The working owner of a business may be considered a participant in the business' Employee Retirement Income Security Act (ERISA)-governed retirement plan.

The United States Supreme Court, overturning a Sixth Circuit Federal Appeals Court’s decision, found if a business’ retirement plan covers one or more employees other than the business owner and their spouse, then the owner may participate on equal terms with other plan participants.   Thus, the owner would be afforded the same ERISA protections as every other employee to protect retirement plan assets from creditors, even in bankruptcy, according to the court’s opinion.


Justice Ruth Bader Ginsburg, writing for the unanimous nine-participating member court in Yates v. Hendon, said the United States Congress intended for working owners to also be considered participants in the firm’s retirement plan, per provisions contained in both the language of ERISA and the Internal Revenue Code (IRC).


Title I contains exemptions from ERISA’s prohibited transaction exemptions, which, like the fiduciary responsibility exemptions, indicate that working owners may participate in ERISA-qualified plans.   “T he statutory provisions of ERISA, taken as a whole, reveal a clear Congressional design to include ‘working owners’ within the definition of ‘participant’ for purposes of Title I of ERISA,” Ginsburg penned in the majority opinion.   And thus, “exemptions of this order would be unnecessary if working owners could not qualify as participants in ERISA-protected plans in the first place,” the opinion said.


Ginsburg also found incentive for the creations of retirement plans that will be beneficial to both the employee and the employer, should working owners be allowed to personally participate, and be afforded ERISA protections, in the company’s retirement plan.   Additionally, the court rules that by allowing the working business owner to participate, the “the anomaly that the same plan will be controlled by discrete regimes: federal-law governance for the nonowner employees; state-law governance for the working owner,” can be avoided.


Legal History


Raymond Yates, a doctor, was the sole shareholder of a corporation and had paid $50,467 into a profit sharing plan to repay the plan for a loan three weeks before having an involuntary bankruptcy petition filed against him under Chapter 7.  Yates sought to shield this payment from the bankruptcy proceedings based on Section 541(c)(2) of ERISA.


Section 541(c)(2) provides “a restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title.” The appeals court found the plan’s “spendthrift clause” – which is required by ERISA and bars “assignment or alienation, either voluntarily or involuntarily” of plan funds except for loans to participants -qualifies as an “applicable nonbankruptcy law” under Section 541(c)(2).  


However, the appeals court decided the bankruptcy trustee could reach the money in the plan, because “as an ’employer,’ a sole shareholder cannot qualify as a ‘participant or beneficiary’ in an ERISA pension plan … the sole shareholder ‘is not an ERISA entity, in other words, and ‘does not have standing under the ERISA enforcement mechanisms.'”  To arrive at its decision, the appellate court relied on its decision in Fugarino v. Hartford Life & Accident Ins. Co.