Fifth Circuit Court of Appeals Raises Potential Problems for Certain Executive Compensation Plans

06/01/2001

The Fifth Circuit Court of Appeals issued a two-sentence opinion that creates potentially serious problems for employers that have adopted executive compensation plans, such as supplemental executive compensation plans or non-qualified deferred compensation plans, that are intended to qualify as “top hat plans” under ERISA.  A “top hat plan” is unfunded and maintained “primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees.”  Top hat plans are free from most of the requirements of ERISA, such as vesting, benefit accrual and funding, and are not subject to the nondiscrimination rules or other limitations contained in the Internal Revenue Code that apply to tax-qualified retirement plans.
 
The Fifth Circuit, confronted with a plan covering a large number of management or highly compensated employees, was asked to determine how large a group was too large to qualify the plan as a top hat plan.  The court affirmed the decision and reasoning of the district court, which stated that to qualify as a top hat plan, the plan had to cover a “select group” of management or highly compensated employees. The district court said the plan under review covered managers and highly compensated employees, but was not a “select group” of those managers and highly compensated employees.
 
Unfortunately, the court did not specifically state how “select” was “select enough.”  However, through the cases and DOL opinions it cited, the court did suggest that the group must be a narrow one, consisting of high ranking management personnel who can protect their retirement and deferred compensation expectations through direct negotiations with the employer. Under the district court’s suggested standards, many existing plans will not qualify for the top hat exemption.
 
At present, we do not know whether the case will be appealed further.  If you would like to explore the implications of this opinion with regard to your executive compensation plans, or any other benefits matters, please do not hesitate to contact one of the authors listed at the top of the page.

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