DOL Weighs In On Top Hat Plan Dispute

For years courts have struggled with defining what qualifies as a "top hat plan." The stakes in these cases are often high, as top hat plans are exempt from most of ERISA's substantive requirements, including from its funding requirement which is necessary for the plan to be tax efficient, and from its minimum vesting requirements which is frequently necessary for the plan's design objectives to be achieved. For example, non-qualified deferred compensation plans must be unfunded to avoid participants from being currently taxed on their benefits until those benefits are actually paid. In addition, many plans are designed to promote employee retention and to enforce non-competition and other post-termination restrictions by using vesting and forfeiture provisions that generally are not permissible under ERISA.

Part of the difficulty in this area has been the absence of interpretive standards, either in ERISA, its legislative history or in regulations. ERISA defines the exemption as covering a plan that "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." There is very little in ERISA's legislative history to help interpret this "select group" requirement, and the U.S Department of Labor (DOL) has never issued regulations. Instead, the DOL has issued a handful of advisory opinions on this topic over the past 41 years. The early advisory opinions, and the courts that drew from those opinions, focused on various objective factors to determine top hat plan status. Factors frequently considered by the courts were the percentage of the employer's workforce covered under the plan, how the average compensation of plan participants compared with that of the rest of the employer's workforce and the compensation levels of participants in absolute terms.

Beginning in 1990, the DOL adopted two additional interpretations narrowing the scope of top hat plan the exemption (see DOL Advis. Op. 90-14A). First, the DOL adopted the position that a select group is limited to persons who "by reason of their position or compensation level, have the ability to affect or substantially influence, through negotiation or otherwise, the design and operation of their deferred compensation plan." This bargaining power factor has since been accepted by a number of courts as one, but not the exclusive, means of evaluating a plan's status. In addition, the...