Top-Hat Plans

What is a top-hat plan? Section 201(2) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) defines a “top-hat” plan as one which is unfunded (paid from the general, attachable assets of the corporation) and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees. Plans that qualify under this definition are generally not subject to the requirements of Title I of ERISA, which include rules regarding minimum participation, vesting, distribution, minimum funding, fiduciary standards and the requirement that plan assets be held in trust. In addition, top-hat plans are generally subject only to relaxed reporting and disclosure requirements and consequently do not have to fill out a Form 5500 Annual Report.

Are you the type of employee that belongs in a top-hat plan? While the U.S. Department of Labor has never provided a specific definition of which employees fit within the definition of a top-hat plan, it has noted that the definition contemplates certain individuals who, by virtue of their position or level of compensation, have the ability to influence the design and operation of their deferred compensation plan and thus do not need the rights and protections afforded by ERISA. Courts generally consider certain relevant factors in making the determination as to whether employees are within the purview of the definition, such as: (1) the percentage of the total workforce invited to join the plan; (2) the nature of their employment duties; (3) the compensation disparity between top-hat members and non-members; and (4) the actual language of the plan agreement.

Why is it important whether your plan is treated as a top-hat plan? The implications resulting from a deferred compensation arrangement being found to be a “top-hat” plan can be severe, especially with regard to actions taken by the employer in relation to the plan that would otherwise constitute breaches of their ERISA fiduciary duty under Title I. This was evident in the recent case of Precious Plate, Inc. v. Russell (No. 1: 06-cv-00546-JTC-LGF, W.D.N.Y., 8/22/2011), in which an executive brought suit against his employer for, among other things, breach of fiduciary duty in relation to a split dollar insurance plan. Upon the court finding that the plan constituted a top-hat plan under ERISA, it immediately dismissed the breach of fiduciary duty claims without further discussion, noting that top-hat plans are exempt from ERISA’s substantive requirements because Congress deemed top-level management, unlike most employees, to be capable of protecting their own pension expectations.

Executives need to be proactive in protecting their interests when participating in top-hat plans. As a result, it is incumbent upon executives to actively protect their own interests and expectations in terms of the establishment and monitoring of their deferred compensation agreements, seeing that there is generally no ERISA safety net in the event of employer action that would otherwise be considered a breach of fiduciary duty. Accordingly, executives must be proactive in terms of negotiating and influencing such arrangements and in ensuring that the employer lives up to its end of the bargain.

Blitman and King provides cutting edge, practical advice for clients in the Albany, Buffalo, Manhattan, Long Island, Rochester and Syracuse NY areas.