Working business owner was a plan participant for ERISA purposes.

• Author: Yates, Raymond

The Supreme Court recently held that the working owner of a business may qualify as a "participant" in a pension plan covered by the Employee Retirement Income Security Act of 1974 (ERISA), provided the plan covers one or more employees, other than the business owner and his or her spouse. Such a working owner, in common with other employees, qualifies for the protections ERISA affords plan participants and is governed by its rights and remedies.

Facts

Y was the sole shareholder and president of Y. P.C., a professional corporation, that maintained the X profit sharing plan. Y was the Plan administrator and trustee. From X's inception, at least one person other than Y or his wife was a participant. X qualified for favorable tax treatment under Sec. 401. As required by both Sec. 401(a)(13) and Title I of ERISA (29 USC Section 1056(d)), X contained an anti-alienation provision, which stated in relevant part,"[e]xcept for ... loans to Participants as [expressly provided for in the Plan], no benefit or interest available hereunder will be subject to assignment or alienation, either voluntarily or involuntarily."

Y borrowed $20,000 front the X money purchase pension plan, which later merged into the X profit sharing plan. The loan agreement required Y to make monthly payments over the five-year loan period. However, Y failed to make these payments. In June 1992, coinciding with the plan mergers, Y renewed the loan for five years and again made no monthly payments. In November 1996, he used the proceeds from the sale of his house to make two payments totalling $50,467, which fully paid off the loan's principal and interest.

Three weeks after Y repaid the loan to X, Y's creditors filed an involuntary Chapter 7 bankruptcy petition against Iron. The bankruptcy court determined that the loan repayment qualified as a "preferential transfer" under 11 USC Section 547(b). Thus, it voided Y's repayment of $50,467 to X and ordered X and Y as X's trustee, to pay the sum to the bankruptcy trustee.

Issue

The bankruptcy court held that, as a self-employed owner of the professional corporation that sponsored the pension plan, Y could not "participate as an employee under ERISA and ... [therefore could not] use its provisions to enforce the restriction on the transfer of his beneficial interest in the Defendant Plan." Thus, X and Y, as trustee, could not rely on X's ERISA anti-alienation provision to prevent the bankruptcy trustee from recovering the loan...