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September 8, 2015

2015-Issue 30—Many companies maintain “top hat” plans to provide supplemental pension benefits to their top-paid employees. A recent brief filed by the Secretary of Labor in pending litigation suggests that sponsors of such plans may want to rethink the population that is allowed to participate in such plans.

A top hat plan is a pension plan that, according to the statutory definition, 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. Such plans are exempt from many of the requirements of the Employee Retirement Income Security Act of 1974 (ERISA) that are intended to protect the rights of plan participants. For example, top hat plans are not subject to requirements regarding participation, vesting, fiduciary duties or participant disclosures, to name a few. The reason that Congress excluded top hat plans from these requirements is that it deemed top-level management, unlike most employees, to be capable of protecting their own pension expectations.

In a case styled Bond v. Marriott Int’l, Inc., No. 15-1160(L), which is pending in the Fourth Circuit, the Secretary of Labor filed a brief asamicus curiae, taking the position that the plan at issue would not qualify as a top hat plan because it covered participants who were not considered management or highly compensated. The Department of Labor essentially takes the position that a plan cannot be a top hat plan if it includes any participants who are not management or highly compensated.

It has been a subject of some debate as to whether the term “primarily” in the statutory definition of a top hat plan is intended to modify the purpose of the plan (to provide deferred compensation) or the group of eligible participants (select group of management or highly compensated employees). Some companies that sponsor these types of plans have historically taken the approach that so long as the plan primarily covers management or highly compensated employees, it should qualify as a top hat plan. Therefore, those top hat plan sponsors would allow employees who may not actually be management or highly compensated to participate in such plans, with the thought that the “top hat” status of the plan should be intact as long as the number of such employees in the plan is minimal.

In the brief filed by the Secretary of Labor in the Bond case, the DOL takes the position that in the event that any employees who are not “management or highly compensated” are permitted to participate in a top hat plan, the plan will not qualify for the top hat exemption and will be subject to all of the requirements of ERISA. In the Bond case, the plan at issue provides significant stock-based pension benefits to thousands of Marriott employees and former employees. Because of the number of employees covered by the plan who were not management or highly compensated, this is a case with bad facts — which usually makes bad law.

Alvarez & Marsal Taxand Says:
Companies sponsoring top hat plans should be aware of the DOL’s position regarding those who are permitted to participate in such plans. To the extent that the plan includes any participants who might not qualify as “management  or highly compensated,” companies should analyze whether the risk of a finding that the plan does not qualify as a top hat plan warrants a change in the plan or its administration to narrow the class of employees allowed to participate. Your Taxand professionals stand ready to assist with this analysis.

The information contained herein is of a general nature and based on authorities that are subject to change. Readers are reminded that they should not consider this publication to be a recommendation to undertake any tax position, nor consider the information contained herein to be complete. Before any item or treatment is reported or excluded from reporting on tax returns, financial statements or any other document, for any reason, readers should thoroughly evaluate their specific facts and circumstances, and obtain the advice and assistance of qualified tax advisors. The information reported in this publication may not continue to apply to a reader's situation as a result of changing laws and associated authoritative literature, and readers are reminded to consult with their tax or other professional advisors before determining if any information contained herein remains applicable to their facts and circumstances.
About Alvarez & Marsal Taxand
Alvarez & Marsal Taxand, an affiliate of Alvarez & Marsal (A&M), a leading global professional services firm, is an independent tax group made up of experienced tax professionals dedicated to providing customized tax advice to clients and investors across a broad range of industries. Its professionals extend A&M's commitment to offering clients a choice in advisors who are free from audit-based conflicts of interest, and bring an unyielding commitment to delivering responsive client service. A&M Taxand has offices in major metropolitan markets throughout the US., and serves the U.K. from its base in London.Alvarez & Marsal Taxand is a founder of Taxand, the world's largest independent tax organization, which provides high quality, integrated tax advice worldwide. Taxand professionals, including almost 400 partners and more than 2,000 advisors in nearly 50 countries, grasp both the fine points of tax and the broader strategic implications, helping you mitigate risk, manage your tax burden and drive the performance of your business.
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