California federal court rules that ERISA does not apply when company owners the only plan participants

In Capital One, N.A. v. Saks (No. CV 13–06411 SJO), Judge Otera of the Federal Central District of California considered a life insurance beneficiary dispute. Like most interpleader disputes in either state or federal court, the first issue involved whether the life insurance policy was governed by ERISA.

ERISA typically applies when life insurance is obtained as a benefit of employment. Employee retirement savings are typically considered part of ERISA pension benefit plans, whereas employee life insurance are considered ERISA welfare benefits. In order to fall  under ERISA, the plan must be (1) a plan, fund or program, (2) established or maintained, (3) by an employer or employee organization, (4) for the purpose of providing benefits (5) to participants or their beneficiaries. 29 U .S.C. § 1002(1).

In this case, Judge Oetera considered a circumstance where the small business was owned by a formerly married couple.  There was a plan established by the small company, for the purpose of providing benefits. However, the available evidence was that the company had no employees except for the owners.   

ERISA defines a “participant” as “any employee or former employee of an employer, or any member or former member of an employee organization, who is or may become eligible to receive a benefit of any type from an employee benefit plan which covers employees of such employer or members of such organization, or whose beneficiaries may be eligible to receive any such benefit.” 29 U.S .C. § 1002(7). “The term ‘employee’ means any individual employed by an employer.” 29 U.S.C. § 1002(6).

In order to clarify these definitions, the Secretary of Labor promulgated the following definition of "employee:"  (1) An individual and his or her spouse shall not be deemed to be employees with respect to trade or business, whether incorporated or unincorporated, which is wholly owned by the individual or by the individual and his or her spouse, and (2) A partner in a partnership and his or her spouse shall not be deemed to be employees with respect to the partnership. 29 C.F.R § 2510.3(c)(1)-(2).

Because of this definition of employee, the federal district court in California found that the particular plan was not governed by ERISA. The only "employees" participating in the plan were the married couple who were the sole owners of the company.

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