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A profit-sharing plan and a pension plan are covered by ERISA even if all of the participants are part owners of the company and family members, so long as the company is not entirely owned by a single person or a married couple, the 3rd U.S. Circuit Court of Appeals has ruled. In Leckey v. Stefano, the court reversed a lower court’s dismissal of the suit, finding that it had misinterpreted the 3rd Circuit’s 1996 decision in Matinchek v. John Alden Life Insurance Co. In Matinchek, the court held that ERISA does not regulate a health plan that does not cover any “employees” but instead benefits only a sole business owner and his immediate family. U.S. District Judge Robert J. Cindrich of the Western District of Pennsylvania focused on a footnote in Matinchek that says: “This holding applies to all businesses solely owned by immediate family members, regardless of whether the owners are sole proprietors, sole shareholders, or partners.” Cindrich concluded that with Matinchek, the 3rd Circuit had effectively expanded ERISA’s exclusion of plans covering only sole owners and their spouses to exclude any plans covering only joint owners who are immediate family members. As a result, Cindrich found that he had no jurisdiction to hear a suit over a pension plan and a profit-sharing plan at American Carbyde, a family-owned company in which the only participants in the plans were two related co-owners — a man and his stepdaughter. Cindrich concluded that “shareholders of a company, all of whom are immediate family members, are owners, not employees, for purposes of determining whether a plan is covered by ERISA.” Now the 3rd Circuit has ruled that Cindrich misinterpreted Matinchek. “The court in Matinchek was called upon to decide only whether ERISA governed an insurance plan covering a husband and wife who co-owned a business. It was not asked to decide whether ERISA would also govern a policy that covered other immediate family who jointly owned a business,” U.S. Circuit Judge Samuel A. Alito wrote. “As a result, even if the court’s footnote is read as suggesting that immediate family members who jointly own a company do not count as employees, that assertion is merely dictum,” Alito wrote in an opinion joined by U.S. Circuit Judges Dolores K. Sloviter and Morton I. Greenberg. Alito said it was wrong to read Matinchek as extending ERISA’s exclusion to immediate family members other than spouses. Instead, Alito said, the distinction hinges on whether an owner can be considered an “employee.” Under the exclusion, a sole owner or a married couple who jointly own a company cannot be considered employees. Hence, if a benefit plan of any sort covers only such an owner, it does not trigger ERISA regulation because it does not cover any employee. The confusion in the Matinchek case resulted from the court’s discussion of health benefits that extended to the man’s family. But Alito said the court was simply explaining that none of the family members in that case were employees. In contrast, Alito found that the owners of AmCarb — William Knapp; his wife, Evelyn Knapp; and his stepdaughter, Janice Leckey — were not excluded from being considered employees. In the suit, Leckey and the estate of Evelyn Knapp challenged distributions made without her consent by William Knapp prior to his death in 1993. Because the plans required Evelyn Knapp’s consent, the suit alleged that the distributions violated ERISA. But Cindrich found that since William Knapp was the only beneficiary of the profit-sharing plan and since he and Leckey were the only beneficiaries of the pension plan, neither plan included any “employees” as defined by Matinchek. The 3rd Circuit revived the suit, finding that both plans include at least one employee. “The regulation only prevents spouses who wholly own a business from being counted as employees,” Alito wrote. “It is undisputed that Janice was William’s stepdaughter, not his spouse. Because William and Janice were not spouses, they could be counted as employees, even though they were also owners.” Leckey and the estate of Evelyn Knapp were represented by attorneys William R. Caroselli of Caroselli Beachler McTiernan & Conboy and solo practitioner Edward C. Leckey, both in Pittsburgh. The plan administrators were represented by attorneys Harry F. Kunselman and David A. Strassburger of Strassburger McKenna Gutnick & Potter, also in Pittsburgh.

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