Supreme Court: ERISA Creditor Protection for Owner/Employees

By: George M. Morrison, Esq., email gmorrison@cbginc.com

www.cbginc.com

     Last year we addressed the Supreme Court’s pending review of the Yates case. (Original Article).  The Supreme Court has ruled, and the news is good for business owners.

     At issue is creditor protection. A participant’s account in an ERISA-covered plan is not subject to claims of creditors. The only exception relates to qualified domestic relations orders (“QDRO”) incident to a participant’s divorce.

     In today’s litigious society, the creditor protection afforded by ERISA is of significant importance to plan participants. Medical professionals, for instance, consider it essential in light of the inherent risk of catastrophic malpractice litigation.

     ERISA’s creditor protection is a significant difference between a tax-qualified plan and an Individual Retirement Account (“IRA”). An IRA is not subject to ERISA and is only protected from creditors to the extent so provided under an individual State’s laws. These laws vary widely.

     It has long been settled that a plan benefiting only the owner of a business is not an ERISA-covered plan. Thus, that owner is not subject to ERISA’s creditor protection. In that case, the retirement plan account is treated similarly to an IRA.

     In the Yates case, the Supreme Court dealt with a working owner’s participation in a plan in which his employees also participated. The Sixth Circuit Court of Appeals held that a business owner who is an “employer” for ERISA purposes may not also be an “employee.” Thus, in the Sixth Circuit’s opinion, Yates was not an employee subject to ERISA’s creditor protection.

     The Supreme Court rejected the Sixth Circuit’s position. In the Supreme Court’s opinion, the working owner of a business may participate in a business-sponsored ERISA plan on equal terms with other plan participants, if the plan covers one or more employees other than the owner and his spouse. As a result, the sole shareholder and president of a professional corporation was a plan “participant” who qualified for ERISA protections, including ERISA’s creditor protection.

     The Court’s opinion does not extend ERISA’s creditor-protection to plans in which no non-owners participate. However, the Court does make clear that ERISA’s creditor protection covers working owners who participate in plans in which non-owner employees also participate.