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Top Hat Plan
Practical Law Glossary Item 3-501-5245 (Approx. 3 pages)
Glossary
Top Hat Plan
A plan that is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation or welfare benefits for a select group of management or highly compensated employees. Top hat plans are exempt from certain requirements of the Employee Retirement Income Security Act (ERISA) such as the participation, vesting, and fiduciary responsibility provisions. However, top hat plans are subject to ERISA's administration and enforcement provisions as well as some of the disclosure requirements. See Practice Note, Title I of the Employee Retirement Income Security Act (ERISA): Overview.
The Department of Labor (DOL) has not articulated a bright-line standard for defining what constitutes a select group of management or highly compensated employees. However, the definition of highly compensated employee in Section 414(q) of the Internal Revenue Code (IRC) is not a safe harbor for determining top hat plan status. The DOL has also indicated that the top hat group should be limited to individuals who, by virtue of their position or compensation level, have the ability to affect or substantially influence the design and operation of the arrangement, and therefore would not need the substantive rights of Title I of ERISA. DOL Adv. Op. 90-14A (5/8/90).
There are two general types of top hat plans:
- A nonqualified deferred compensation plan that permits participants to defer an amount of income into the plan during each calendar year (see Standard Document, Nonqualified Deferred Compensation Plan). For more information on nonqualified deferred compensation plans, see Section 409A Toolkit.
- A supplemental executive retirement plan (SERP). SERPs provide additional retirement income to the plan participants in excess of what they are entitled to receive under the employer's qualified plan. In a SERP, the employer provides the funding for the annual contributions to the plans and there are usually limits based on factors such as annual salary that determine the exact amount of funding provided.
To be considered unfunded:
- The assets of a top hat plan must be available to the employer's creditors at all times.
- The participant merely has an unsecured promise by the employer to pay the amounts under the plan when due.
For a model letter that the plan administrator of a top hat plan that is an employee pension benefit plan could have provided to the DOL before August 16, 2019, to satisfy the reporting and disclosure requirements of ERISA, see Standard Document, Top Hat Plan Letter. Starting on August 16, 2019, top hat plan notices and statements must be filed online through the Employee Benefits Security Administration's (EBSA's) website (see Legal Update, DOL Finalizes Regulations on Electronic Filing of Apprenticeship and Training Plans and Top Hat Plans).