The Employee Retirement Income Security Act (ERISA) exempts from many requirements “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.”

In an amicus brief filed with the 4th U.S. Circuit Court of Appeals, the U.S. Department of Labor (DOL) says the word “primarily” is an adverb that modifies the prepositional phrase “for the purpose of providing deferred compensation” that immediately follows it. It does not modify the more remote prepositional phrase “for a select group of management or highly compensated employees.”

According to the brief, this means that while the most important purpose of the plan must be to provide deferred compensation to a select group of management or highly compensated employees, a top hat plan may have other, secondary purposes, such as retaining top talent, allowing highly compensated individuals to realize earnings in later tax years with presumably lower marginal tax rates, or avoiding limitations in the Internal Revenue Code that apply to tax-qualified plans. The DOL says it does not mean that the “select group” may be primarily composed of management or highly compensated individuals. Nor does it mean that a top hat plan can have a secondary purpose that is inconsistent with the primary purpose, such as covering individuals who are outside the “select group” set by statute.

According to the DOL, allowing an employer to intentionally draft or operate a top hat plan to include ordinary employees who are neither management nor highly compensated directly undermines ERISA’s protections for employees who are not in a position to negotiate for a separate pension plan and who are thus the primary targets of the entire ERISA statutory scheme. In Advisory Opinion 90-14A, the DOL said, “It is the view of the Department that in providing relief for ‘top hat’ plans from the broad remedial provisions of ERISA, Congress recognized that certain individuals, by virtue of their position or compensation level, have the ability to affect or substantially influence, through negotiation or otherwise, the design and operation of their deferred compensation plan, taking into consideration any risks attendant thereto, and, therefore, would not need the substantive rights and protections of Title I.”

In its amicus brief, the DOL reminded the 4th Circuit that in a previous case, Darden v. Nationwide Mutual Ins. Co., when addressing the “select group” part of the top hat test, the court rightly pointed out that “implicit in the congressional statement of purpose is the recognition that the persons to be aided by the statute lacked sufficient economic bargaining power to obtain contractual rights to non-forfeitable benefits.” 

NEXT: Two courts struggling with ‘top hat’ status.

In the case before the 4th Circuit, Bond v. Marriott International, former employees of Marriott International argue that its deferred stock bonus awards (Retirement Awards) program was not a ‘top hat’ plan and was subject to ERISA vesting requirements. At one time the plan covered more than 2,500 employees, but it was amended after the DOL’s 1990 advisory opinion letter, and after that covered only about 100 employees.

The plan used a prorated vesting schedule based on each participant’s time until he or she reached age 65. The plaintiffs in the case did not fully vest in their benefits because they left employment before reaching age 65.

The U.S. District Court for the District of Maryland found that the plan was a ‘top hat’ plan and thus not subject to ERISA’s vesting requirements. However, in its amicus brief, the DOL urged the appellate court to find otherwise.

Another court has recently struggled with the determination of a plan’s top hat status, and has decided a trial is needed to weigh the issues. The U.S. District Court for the Southern District of Texas, said it is not readily clear whether the ‘substantial influence” issue introduced by the DOL in Advisory Opinion 90-14A is an additional consideration for the courts in determining the selectivity issue, or whether it stands as an additional factor requiring separate analysis.

U.S. District Judge Keith P. Ellison concluded that had Congress wanted to incorporate a "substantial influence" requirement into the top hat statute, it could have done so, but it didn’t. Nevertheless, the "substantial influence" factor was discussed and applied to a degree by previous courts, so the factor cannot be discounted. To resolve this dispute, and because the parties also disagree as to the relevant numbers defining a "select group" of employees, Ellison said, the court's determination of these issues will require a trial.