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
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.