In a recent decision, Tolbert v. RBC Capital Markets Corp., _________ (S.D. Texas April 28, 2015), the district court wrestled with the question of how to determine whether a deferred compensation plan was a “top-hat” plan exempt from many of the substantive requirements of the Employee Retirement Income Security Act (“ERISA”).
The Fifth Circuit previously had determined that the deferred compensation plan was a “pension plan” covered by ERISA. ERISA defines a “pension plan” to be any plan, fund, or program established or maintained by an employer which (1) provides retirement income to employees OR (2) results in a deferral of income for periods extending to the termination of covered employment or beyond. Section 3(2) of ERISA. Under this definition, some but not all, deferred compensation plans will be subject to ERISA.
ERISA generally requires pension plans to comply detailed and complex requirements with respect to participation, vesting, funding, and reporting and disclosure. However, a retirement or deferred compensation plan, however, will be exempt from these requirements if (1) the plan is an “unfunded” plan within the meaning of Title I of ERISA, and (2) the plan is maintained “primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees.” Such plans are commonly referred to as “top-hat” plans.
There are no explicit statutory or regulatory guidelines under ERISA for determining whether employees covered by a plan constitute “a select group of management or highly compensated employees.” Individually issued opinions of the Department of Labor (“DOL”), as well as its informal public statements, have evidenced a significant degree of ambivalence in making this determination. Similarly, the courts have not applied consistent guidelines in determining whether a plan covers a “select group”.
Several court decisions and some old DOL Advisory Opinions have taken a fairly mathematical approach focusing on the size of the covered group in relation to the employer’s total workforce and the select group’s average salary in relation to the remainder of the workforce in determining whether the covered employees constitute a “select group”.
In Advisory Opinion 90-14A (May 8, 1990), the DOL indicated that it would take a more subjective approach and look at the job positions included in the covered group in determining whether the “top-hat” requirements have been met – in particular, whether a covered employee has the ability to influence his or her compensation. The DOL also took the position that a plan which extended coverage to employees who were not part of a “select group of management or highly compensated employees” would not constitute a “top-hat” plan. The DOL, however, did not include any examples in Advisory Opinion 90-14A and, to date, has not provided any additional discussion or details as to its view of the application of the select group requirement of the “top-hat” plan exemption.
The district court had to wrestle with this definitional question and held that too many factors remained at issue to determine whether the plan was a top-hat plan exempt from most of the ERISA requirements.
It is important to note that the top-hat status question is much more likely to come up in a situation involving employer contributions (and the forfeiture of those contributions) as opposed to pure employee-only compensation deferrals.