8727 / If a self-employed owner-employee establishes a qualified retirement plan, is that plan entitled to ERISA protections?

In some instances, a plan established by an owner-employee (see Q 8726) will be entitled to ERISA protections (such as rules regarding the vesting of benefits and ERISA’s anti-alienation provisions), but in other cases, participants in such a plan will not be entitled to the same protections as are available to traditional employees. The answer turns on whether employees other than the self-employed individual and the individual’s spouse also participate in the plan.

Regulations promulgated by the Department of Labor provide that an owner-employee and spouse are not considered employees of a business that is wholly owned by those individuals.¹ Therefore, if only the owner-employee and spouse participate, the plan will not be subject to ERISA. Accordingly, Section 514(a) of Title I of ERISA would not preempt state regulation of the arrangement.²

However, the Supreme Court has ruled that if the owner-employee and spouse allow additional employees to participate in the plan, that plan will be subject to ERISA and entitled to its protections. In this case, both the employees and the owner-employee and spouse are entitled to ERISA protection.³

Planning Point: In some instances, it may be desirable for a qualified plan to become subject to ERISA’s rules and protections rather than the state law provisions that may be found to apply if ERISA does not preempt state law. In other instances, state law provisions that would otherwise govern may be preferable.