The Employee Retirement Income Security Act (ERISA) subjects employee benefit plans such as deferred compensation arrangements to complex and far reaching rules designed to protect the integrity of such plans and the expectations of their participants and beneficiaries. See generally Mertens v. Hewitt Associates, 113 S.Ct. 2063, 2066 (1993).
Erisa’s coverage provisions, 29 U.S.C. Sections 1003, 1051, 1081, and 1101, state ERISA shall apply to any employee benefit plan, other than the listed exceptions. One of these exceptions, known as a top hat plan, is defined as: “a plan which is unfunded and is maintained by the employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees.” ERISA Secs.201(2),(301)(a)(2), and 401(a)(1).
Top Hat plans are exempt from the participation and vesting provisions of ERISA, 29 U.S.C. Sections 1051-1061, its funding provisions, 29 U.S.C. Sections 1081-1086, and its fiduciary responsibility provisions, 29 U.S.C. Sections 1101-1114, though not from its reporting and disclosure provisions, 29 U.S.C. Sections 1021-1031, or its administration and enforcement provisions, 29 U.S.C. Sections 1131-1145.
Whether a Plan is Funded:
A plan is unfunded where there is no res (or property) separate form the ordinary assets of the corporation. Dependahl v. Falstaff Brewing Co., 653 F.2d 1208, 1214 (8th Cir.1981), cert. denied, 454 U.S. 968 (1981);Gallione v. Flaherty, 70 F.3d 724,725 (2d Cir.1995)(A plan is unfunded where “benefits thereunder will be paid …solely from the general assets of the employer.”); DOL Advisory Op. 81-11A(Jan.15, 1981). In Miller v. Heller, 915 F.Supp. 651 (S.D.N.Y.1996), the court held that the question a court must ask in determining whether a plan is unfunded is: “can the beneficiary establish, through the plan documents, a legal right any greater than that of an unsecured creditor to a specific set of funds from which the employer is, under the terms of the plan, obligated to pay the deferred compensation?” Id. at 660. An executive will need to examine whether the plan documents, employment agreements, and severance agreements contain provisions that can be interpreted specifically or broadly are intended to be funded by the company separately, such as through a trust arrangement.
Whether the Plan Is Maintained Primarily for a Select Group:
To determine whether the participants of an employee benefit plan are a “select group of management or highly compensated employees,” 29 U.S.C. Sections 1051(2), 1081(a)(3), and 1101(a)(1), a court is required to conduct a fact specific inquiry, analyzing quantitative and qualitative facts in conjunction. See e.g. Duggan v. Hobbs, 99 F.3d 307, 312 (9th Cir.1996) (holding that the “select group” requirement includes “more than a mere statistical analysis”); Senior Executive Benefit Plan Participants v. New Valley Corp., 89 F.3d 143, 148 (3d Cir.1996)(considering “both quantitative and qualitative restrictions”).
While plans offered to a very small percentage of an employer’s workforce often qualify as top hat plans, see, e.g., Gallione, 70 F.3d at 726 (0.2% of total Union membership, although this figure represented 22 of 68 Union managers); Duggan, 99 F.3d at 312 (a single employee); Belka v. Rowe Furniture Corp., 571 F.Supp. 1249, 1252 (D.Md.1983)(4.6% of workforce), there is no existing authority that establishes when a plan is too large to be deemed “select.” A “select group of management” could include senior management and high-level executives. See Gallione, 70 F.3d at 728 (all full time Union officers constituted a select group); see also, Northwestern Mut.Life Ins. Co. v. Resolution Trust Corp., 848 F.Supp. 1515, 1520 (N.D.Ala.1994)(“certain key officers” and “certain executives”). An additional factor to be included is how broadly is the plan’s inclusion. If the plan sweeps too broadly, then the likelihood is that it will not be a top hat plan, thus regulated by ERISA. A court will also examine the average salary of the participants in the plan. In the case of highly paid executives, it may be found that the average salary may be double that of all other employees. The operative language “primarily” designed to provide deferred compensation for certain individuals who are management or highly compensated, suggests that it was principally intended to cover management and highly compensated employees. That fact that a small number of employees not falling within this group are covered by the plan, does cause the plan to loose the exemption status as a top hat plan.
Courts also examine the participant’s ability to negotiate the terms of the plan. “Ability to negotiate” is an important component of top hat plan analysis. Courts have found that top hat plans are exempted from ERISA’s substantive requirements, “because Congress deemed top-level management, unlike most employees, to be capable of protecting their own pension expectations.” Gallione, 70 F.3d at 727. Congress approved of a lesser level of regulation for top hat plans “on the premise that the employer’s top-level executives have sufficient influence within the institution to negotiate arrangements that protect against the diminution of their expected pensions.” Id. at 728; see also, Kemmerer v. ICI Americas Inc., 70 F.3d 281, 286 (3d Cir.1995)(“Top hat plans…which benefit only highly compensated executives, and largely exist as devices to defer taxes, do not require such scrutiny and are exempted from much of ERISA’s regulatory scheme.”).
Are the Contributions Really Deferred Compensation:
Whether a plan is maintained for the purpose of providing deferred compensation is a question not addressed in ERISA or the case law. Deferred compensation “generally refers to money which, by prior arrangement, is paid to the employee in tax years subsequent to that in which it is earned,” Michael J. Canan, Qualified Retirement and Other Employee Benefit Plans Section 1.6 (West 1994), and a deferred compensation plan may do little more than “simply delay distribution of cash payments to employees.” Id. at Section 2.4. However, a deferred compensation plan may envisage more; it may, for example, tie deferred compensation to continued performance for the corporation and include covenants not to compete. Id. “The basic idea of a deferred compensation plan is simple: part of an employee’s current earnings are made payable in a future year or spread over a future period…The deferral in the case of an elective plan must specify the period of time and form in which the account is to be distributed…The Plan must defer income to termination of employment.” Susan K. Hoffman, Nonqualified Executive Compensation Arrangements, Top Hat and Excessive Benefit Plans, Advanced Law of Pensions and Deferred Compensation, C922 ALI-ABA 1239, 1241, 1244 (July 1994); cf. Modzelewski v. RTC, 14 F.3d 1374, 1376-1377 (9th Cir.1994)(indicating that “ERISA’s definition of a pension plan is so broad, virtually any contract that provides for some type of deferred compensation will also establish a defacto pension plan, whether or not the parties intended to do so.”).
“The term deferred compensation…refers to specific ‘nonqualified arrangements designed and implemented to postpone the income of either a select employee or a group of employees to some future period. Deferred compensation may be, but need not be, based upon a contractual agreement entered into by an employer and selected employees. Such plans may take the form of a salary reduction or may involve deferring a salary increase or bonus payment. Deferred compensation arrangements are generally established prior to, or at the time of, the performance of service to which the compensation relates. Certain arrangements, especially those providing supplemental retirement income benefits, can be adopted after the service has been rendered.” Andrew Lawlor and Mark Manin, Nonqualified Deferred Compensation for Key Executives, in Employee Benefits Handbook, Section 13-2 (Fred K. Foulkes ed.1982).
An examination of the plan documents, employment agreements, and severance arrangements, may reveal whether the contributions to the plan qualify as deferred compensation.
No Fiduciary Duties Owed Under a Top Hat Plan:
Unlike nonexempt ERISA plans, there is no fiduciary duty owed to plan participants under a Top Hat Plan. If the plan falls under the ERISA exemption, then there is no fiduciary duty on the part of the company or its executives who run the plan.
Reporting and Disclosure Requirements:
A top hat plan, like all other ERISA plans, are required to file registration statements and annual report (also providing annual report and summary plan description to plan participants) with the US Department of Labor and the Internal Revenue Service. However, this requirement can be met merely by filing a short statement with the Secretary of Labor and providing plan documents to the Secretary of Labor upon its request. See 29 C.F.R. Section 2520.104-23(b)(prescribing alternative method of compliance); see also, 29 U.S.C. Section 1030 (authorizing Secretary to promulgate alternative methods of compliance for qualifying plans).
Top Hat Enforcement Requirement Under ERISA:
Although a deferred compensation plan falls under the Top Hat exemption, the plan participant can still enforce his rights under the plan pursuant to ERISA. Top Hat plans are not exempt from the administration and enforcement provisions under ERISA. 29 U.S.C. Sections 1131-1145. If the plan fails to pay out under the deferred compensation arrangement, the executive may seek to recover benefits due and past due under the plan. See Anweiler v. American Elec. Power Service Corp., 3 F.3d 986, 992 (7th Cir.1993)(distinguishing between theories underlying fiduciary duty claims and basic claims for benefits under a covered plan). Subchapter I, Subtitle B, Part 5 of ERISA governs administration and enforcement. 29 U.S.C. Sections 1131-45. Section 1132 provides a cause of action either to enforce the substantive provisions of the Act or to recover benefits due or otherwise enforce the terms of a particular plan. 29 U.S.C. Section 1132. See Barrowclough v. Kidder, Peabody & Co., Inc., 752 F.2d 923, 935-37 (3d Cir.1985)(holding that an unfunded Top Hat deferred compensation retirement plan is subject to ERISA’s enforcement provisions).