When does ERISA apply to small business owner benefit plans?

A recent case out of New York’s District Court illustrates when ERISA governs owner benefit plans.

The Employee Retirement Income Security Act of 1974 sets minimum standards for private retirement, pension and health plans. Yet ERISA is a complex law and it is not always clear whether ERISA applies to a particular benefit plan.

ERISA exemption for wholly-owned small businesses

Benefit plans which only apply the owners of wholly-owned businesses may not be subject to ERISA. A prototypical example is a small "mom and pop" business which is wholly owned by one individual or the individual and his or her spouse. If the wholly owned business only provides benefit plans for the owners of the business, but not for any employees, it will not be considered an ERISA plan.

However, ERISA applies to any plans which provide benefits to at least one employee. The exemption only applies to companies owned by a sole shareholder or a sole shareholder and his or her spouse. Even if a plan only covers shareholders, the shareholders would be deemed employees and ERISA governs their benefits.

A recent case from the federal court for the Eastern District of New York provides some clarity for when an owner can also be an employee for purposes of ERISA regulation.

District Court holds ERISA applies to minority owner's disability insurance benefit

In Silverman v. Unum Group, 2015 WL 4603345, decided July 30, 2015, the United States District Court for the Eastern District of New York held that ERISA applied to a benefit plan provided to a minority shareholder.

The plaintiff, Neil Silverman, was an owner of 15 percent of the small business. He was also an employee of the company and was paid a salary. The owner/employee became disabled and obtained long-term disability coverage under a plan which applied to him and the two other owners of the business.

The plaintiff filed suit in New York state court, claiming violations of state law. Unum removed the case to federal court, arguing that ERISA, as a federal law, applied in this situation and preempted New York state law. If ERISA applied, Silverman's benefits were appropriate, according to Unum.

The district court held that the plan was an ERISA plan.

In reaching its conclusion, the court cited a U.S. Supreme Court decision which held that "ERISA's text contains multiple indications that Congress intended working owners to qualify as plan participants." While plans that only apply to sole owners and their partners or spouses are "outside of Title I of ERISA's domain," plans covering both working owners and non-owner employees are "entirely within ERISA's compass."

The court noted that for the ERISA exemption to apply, the corporation would need to have been owned by one person and his or her spouse. In this particular situation, however, the plaintiff owned the company along with two others, so the ERISA exemption did not apply.

Questions on an ERISA plan?

DeBofsky, Sherman & Casciari, PC is an experienced national law firm familiar with ERISA litigation and employee benefit disputes. Contact our firm with questions regarding your legal situation and potential options.