Business Owners- Are Your Retirement Plans at Risk

Back to Knowledge Center

Investment Management and Financial Planning

Ask most business owners if their retirement plan is creditor proof and they’ll say “yes.” That may not be the case.

There is good news and bad news in last month’s US Supreme Court decision.

• If you have employee participants in your plan other than your spouse, you are probably safe.

•If you don’t have non-spousal employees in your plan or if you’re the sole participant in an individual 401k plan, the
situation is not so great. Solo 401(k)s don't necessarily have the same protections as other 401(k) plans; in some
states, solo 401(k)s are protected from creditors, but in others they aren't

On March 2nd, 2004 the U.S. Supreme Court held that working owners of a business may be considered "participants"
in the ERISA-covered pension plans that they sponsor. Consequently, such individuals may be entitled to the same
rights and protections that ERISA affords to their employee-participants

Yates v. Hendon (case No. 02-458) involved Dr. Raymond Yates, who as the sole owner and president of his
professional corporation maintained and controlled a corporate profit sharing plan. In addition to his wife, Dr. Yates at
all times employed one other individual.

The question presented in the Yates case was whether or not a working owner of a business should be considered a
“plan participant” and thus have federal protection for his retirement plan in bankruptcy court.

The Supreme Court decision reversed a federal appeals court in Cincinnati that held a business owner may rank only
as an “employer” and not also as an “employee” for purposes of federal ERISA protection in a retirement plan.
Subsequently, the Cincinnati appeals court decision left the retirement assets of business owners exposed to creditors
in a bankruptcy case, a financial planning disaster.

In support of its decision, the Supreme Court stated “Congress intended working owners to qualify as plan participants”
but also noted that plans covering only sole shareholders and their spouses fall outside (ERISA) Title I domain.

The Employee Retirement Income Security Act of 1974 (ERISA) was enacted “to protect … the interests of participants in
employee benefit plans and their beneficiaries” Title I defines “employee benefit plan” as “an employee welfare
benefit plan or an employee pension benefit plan or both, “participant” to encompass “any employee eligible to receive
a benefit from an employee benefit plan, “employee” as “any individual employed by an employer, and “employer” to
include “any person acting as an employer, or in the interest of an employer.

It’s important to note that Qualified Pension Plans were never creditor proof against two so called “super creditors”.
Those are spouses and the IRS.

As with any aspect of one’s financial plan, there are no cookie cutter solutions. If you are a sole participant in your
pension plan (or if your spouse is the only other participant), and you are concerned about creditor proofing your assets,
you need to find qualified counsel to review your entire strategy. Now would be a good time to start, before any cause of
action occurs.

For more info on the case go to: http://www.accessmylibrary.com/article-1G1-128671345/yates-v-hendon-supreme.html

Business Owners - Are Your Retirement Plans at Risk?
by Cathy Pareto, MBA, CFP®, AIF® - March 2004

The right to download, store and/or output any material on this Web site is granted for viewing use only. Use or viewing of this site acknowledges that you have
read, understand and will abide by our terms of use, legal notices, and disclaimers.