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Managing the Modern Workplace
V&E International Labor & Employment Resources

Conflicting Standards for "Puttin' on the Top Hat": Making Sure That Your Executives' Top Hat Plan Meets the Test

A top hat plan is a plan that provides benefits to a select group of management or highly compensated employees. Because Congress determined that a plan covering a sophisticated group of employees did not warrant the same protections as one covering the general employee population, it provided special carveouts for top hat plans under ERISA. Specifically, a top hat plan does not need to comply with ERISA’s minimum participation, vesting, funding, fiduciary responsibility or trust requirements.

While the Department of Labor has jurisdiction over top hat plans, it has offered only minimal informal guidance as to what types of plans constitute top hat plans such that most of the interpretation has been provided by the judiciary. In reviewing whether an arrangement covers a select group and thus constitutes a top hat plan, courts in different circuits have examined and focused on different factors, including the percentage of the employee population covered and the positions, duties, compensation levels and bargaining power of those employees covered under the plan, which has resulted in a split among the federal circuits as to whether an arrangement covers a select group and thus constitutes a top hat plan.

Most recently, the Third Circuit in Sikora v. UPMC, 876 F.3d 110 (3d Cir. 2017) examined whether a participant’s bargaining power impacted whether an arrangement would constitute a top hat plan. Sikora sued UPMC for claims under ERISA relating to his participation in UPMC’s Non-Qualified Supplemental Benefit Plan (the “Plan”). UPMC filed for summary judgement on Sikora’s ERISA claims on the basis that such provisions did not apply to the Plan because it was a top hat plan. Sikora challenged UPMC’s characterization of the Plan as a top hat plan on the basis that the Plan did not cover a “select group.”

In examining whether the Plan covered a select group of employees, the court found that relatively few employees were covered under the Plan and that those covered were either management or highly compensated. Sikora argued nevertheless that the group was not select because there was no evidence that Plan participants held “bargaining power,” as referenced in a 1990 DOL Pension & Welfare Benefit Programs opinion letter. In reviewing the DOL opinion letter, the court decided that the letter did not stand for the premise that participants must have bargaining power but rather that the participants by way of their position and compensation levels were deemed to hold bargaining power. Thus, the court determined that bargaining power is not a substantive element in determining whether an arrangement covers a select group of employees.

The takeaway from this recent opinion is that while the Second, Sixth and Ninth Circuits have examined a participant’s bargaining power in determining whether an arrangement covers a select group of employees, both the First and Third Circuits have refused to do so. Due to the circuit split, when setting up a new top hat plan or evaluating whether an existing arrangement qualifies for the top hat plan carveouts under ERISA, an employer must consider whether its plan covers a select group of management or highly compensated employees under the factors examined in the applicable jurisdiction, and in the Second, Sixth and Ninth Circuits, bargaining power may factor into that determination.

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Author

Heather J. Reynolds Johnson

Heather J. Reynolds Johnson Senior Associate