A recent Sixth Circuit decision provides a tutorial on designing and administering an ERISA executive compensation top-hat plan. In Daft v. Advest, Inc., a U.S. Court of Appeals for the Sixth Circuit reversed the District Court’s decision that the executive compensation plan was an ERISA plan but was not a top-hat plan, on the grounds that the District Court should have remanded the matter to the plan administrator for expansion of the administrative record and its own determination on this issue. This is good news for the employer, and presumably good news for the other plan participants, because an executive deferred compensation plan that is an ERISA plan but is not a top-hat plan would seemingly be a tax debacle.

The plan at issue provided deferred compensation benefits for certain executives. The employer apparently intended for the plan to be an ERISA “top-hat plan.” A top-hat plan is a plan “which 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.” This type of plan is exempt from many of ERISA’s provisions, including funding, vesting and fiduciary requirements.

Lessons for the Employer and Administrator

Three important lessons regarding designing and administering an ERISA executive compensation top-hat plan can be gleaned from Daft v. Advest, Inc.:

  1. Design top-hat plan terms to comply with ERISA and Internal Revenue Code requirements, keeping in mind that we have limited case law on the parameters of the “select group” and that executives will presumably terminate employment and forfeit benefits before challenging top-hat plan status.
  2. Develop administrative procedures to confirm that the ever-changing requirements are being met. This is a challenging area of the law, and failing to get the counsel needed on the front end can be painful and expensive on the back end.
  3. Recognize the importance of the claim appeal procedure and the administrative record, and the impact this will have in subsequent litigation. Require claimants to fully explain their rationale, ask questions, make certain that the proper legal analysis is being applied, and completely develop the factual record. The Daft administrator was given a chance to correct its procedural errors, but only after litigation at both the district court and appellate court level.

This may be more than enough information for one day. But if you would like to know more about this case and these issues, keep reading . . .