Puzzle pieces.jpg

Top Hat Plan Basics?

Top Hat plans are deferred compensation plans designed to benefit top management. They are exempt from most of ERISA’s requirements such as the vesting, funding and fiduciary duty requirements (but not reporting requirements) on the theory that high-level participants are able to protect themselves and so do not need the protections of ERISA.

 

1. What are the requirements to be a Top Hat Plan?

There are three statutory requirements:

  1. The plan must be unfunded;

  2. The plan must be maintained “primarily” for certain “top hat” employees; and

  3. The plan must cover only a “select group of management or highly compensated employees.”

 

2. How does a plan satisfy the statutory requirements to be a Top Hat Plan?

 

To determine if a plan satisfies the statutory requirements, a court looks at all the “facts and circumstances” generally including:

 

  1. The percentage of the total workforce invited to join the plan (10-15% is one guideline);

  2. The nature of the participants’ employment duties, including whether they are part of management (supervisory duties) and whether they have actual bargaining power with respect to terms of the plan;

  3. The compensation disparity between top hat plan and non-top hat members (a 2:1-3:1 ratio between top hat group members and all other employees is favorable); and

  4. The actual language of the plan agreement.

 

3. How can a plan make sure it will be treated as a Top Hat Plan?

 

There is no guaranty that a court will treat a plan as a top hat plan. Again, it is a “facts and circumstances” determination. However, here are some practical tips for employers:

 

  1. When establishing a top hat plan, carefully consider which employees to cover in the plan – e.g., unless the company is very large, the plan document could provide for individual selection of each participant allowing for careful consideration of their individual facts and circumstances and the status of the plan as a top hat plan.

  2. Designate the plan as a “top hat plan” in the plan document and describe top hat purpose and type of participants it covers.

  3. Be careful that the plan is actually unfunded.

  4. Make sure a top hat notice must be filed within 120 days of the plan’s adoption to avoid Form 5500 filing requirements.

 

Please feel free to contact one of our attorneys regarding any questions you may have about the records retention requirements under ERISA.