Conflicting Review Standards In Executive Retirement Plan Benefit Claims—Is There Really A Difference?

Under the Employee Retirement Income Security Act, retirement plans generally come in two flavors - (i) retirement plans qualified under Section 401 of the Internal Revenue Code (the Code) and (ii) executive retirement plans, called ''top hat'' plans, which aren't Code-qualified. What does that mean? While qualified retirement plans are subject to all of ERISA's funding, participation and fiduciary provisions, top hat plans aren't and may offer benefits exceeding those allowed under Code-qualified plans. Simply put, top hat plans are unique animals under ERISA.

ERISA defines a top hat plan as one ''which is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees.''1 ERISA treats top hat plans differently in several ways. First, ERISA explicitly exempts top hat plans from its fiduciary requirements.2 In addition, ERISA doesn't require top hat plans to satisfy participation, funding and vesting requirements that are applicable to other ERISA-governed retirement plans.3 Moreover, the Department of Labor allows top hat plans an exemption from disclosure requirements.4 So, in essence, top hat plans are only subject to ERISA's civil enforcement remedies and administrative claims procedures.- As a result, ERISA affords top hat plan participants and beneficiaries their sole remedies for recovering benefits or enforcing plan terms.6 Put another way, while top hat plan participants may not sue for breaches of fiduciary duty or illegal benefit cutbacks under ERISA, they may challenge benefit determinations, but must do so only under ERISA Section 502(a)(1)(B) and only after exhausting their administrative claim remedies.7

Litigation involving top hat plans isn't plentiful— likely due to the fact that such plans are available only to a small number of highly paid executives. However, within the limited top hat litigation realm, there exists a conflict among the federal courts of appeals over a seminal question—what review standard is to be applied to a benefit determination? While the U.S. Supreme Court has definitively answered this question for most ERISA plans in Firestone Tire & Rubber Co. v. Bruch,8 the unique nature of top hat plans has resulted in conflicting rules among the circuits. Whether these conflicting standards elicit similar results is an open and complex question for most ERISA practitioners.

Typical Standard of Review in ERISA Benefit Cases

The standard of review applied in a lawsuit is, many times, a case determinative decision by the court. For instance, in a criminal case, the prosecution has a very high burden to prove guilt beyond a reasonable doubt. In civil cases, if the review standard is de novo, then the party that offers sufficient evidence to prove their claims is victorious. And, in cases where the court reviews a claim on an abuse of discretion or arbitrary and capricious standard, the plaintiff bears the high burden to prove a defendant's position is objectively unreasonable.

In 1989, the Supreme Court in Firestone set forth the prevailing rule for determining the review standard to be applied in ERISA benefit cases. In Firestone, the court, drawing from trust law principles, held that a de novo review standard should be applied to a plan's benefit determination, under which the court should grant no deference to the plan's decision. However, when a plan grants the plan administrator discretionary authority to interpret and construe its terms, the appropriate review standard is that the benefit determination will be upheld so long as it isn't arbitrary or capricious.9

Since 1989, the Firestone test has been applied across myriad ERISA-governed plans with one exception—top hat plans. Since top hat plans are ''odd ducks'' under ERISA, the circuits of the U.S. Courts of Appeals have taken very divergent views towards whether Firestone applies to top hat plan benefit determinations. This circuit split is made odder by the circuits that have been grouped together. For example, the Seventh Circuit (typically employer friendly) joins with the Ninth Circuit (typically plaintiff friendly) in applying Firestone, while the Third Circuit (typically plaintiff friendly) joins with the Eighth Circuit (typically employer friendly) in creating exceptions to the Firestone rule.

There are two fundamental...