Court Refuses to Apply New Test for Top Hat Plans

A former employee of a Pennsylvania non-profit cannot rely on the Employee Retirement Income Security Act (ERISA) for benefit protections as the plan in which he participated is a “top hat” plan, a court found.

Noting that a non-qualified deferred compensation plan under Section 457(f) of the Internal Revenue Code must be maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees, U.S. District Judge Mark R. Hornak of the U.S. District Court for the Western District of Pennsylvania looked to a 3rd Circuit case which said “the plan must cover relatively few employees . . . [and] the plan must cover only high level employees.” The non-profit UPMC provided evidence that from 2007 through 2011 the number of plan participants ranged from 16 to 68. During that time, the total number of UPMC employees ranged from 37,965 to 48,731, so the absolute highest percentage of employees participating in the plan was .14%. Hornak concluded this was “relatively few.”

According to the court opinion, UPMC’s Non-Qualified Supplemental Benefit Plan limits participation to “key executives selected by the Committee,” and the primary factors in selecting those key executives are their influence within the organization and their ability to impact its performance. UPMC provided a comprehensive listing of the job titles of plan participants and they include various presidents, vice presidents, and other chief and senior officials. UPMC also argued that the compensation of these employees makes certain their “high level status.” Eligibility to participate in the plan is limited to those whose incentive levels under the separate management incentive plan are at least 20% of their salary. During the relevant period, the average compensation of plan participants was roughly $500,000 per year. Hornak concluded these employees were “very handsomely compensated by any measure.”

However, the plaintiff in the case, Paul F. Sikora, argued there is another element to determining whether a plan is a top hat plan: bargaining power of participants. Sikora points to the Department of Labor (DOL) Advisory Opinion Letter 90-14A, in which the DOL says, “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 [ERISA].”

Hornak noted there has not been one federal court that has applied “bargaining power” as an element in determining whether a deferred compensation plan is a top hat plan that is exempt from ERISA coverage. He agreed with a 1st Circuit opinion, which said not only is that letter not entitled to deference, it is merely a description of the purposes that the DOL thought Congress likely had in mind when enacting the top hat exemption.

Earlier this year, the DOL reiterated its stance about top hat plans in an amicus brief filed for another lawsuit. In June, another district court judge decided the issue of participants’ influence on the plan should be decided at trial.                            

Hornak said even if the court were to accept that the letter adds bargaining power to the list of elements in determining top hat plan status, the letter itself says top hat plan participants are presumed to be able “to affect or substantially influence, through negotiation or otherwise” the design and operation of their plan. He concluded that the DOL recognized that top hat plan participants have other means besides direct negotiation to affect or influence the plan design. For example, they could threaten to leave the company if they weren’t happy with the terms or operation of the plan.

Sikora, a vice president at UPMC, was a participant in the non-profit’s supplemental benefits plan from 2008 until he voluntarily terminated his employment with UPMC in 2011. Sikora applied for a lump-sum distribution of his account balance and says he never received a written decision from the plan committee.

He kept pursuing the distribution throughout 2012, and eventually received a letter from the committee informing him that all rights and benefits allegedly due to Sikora had been forfeited because Sikora had not entered into a written Post Retirement Service Agreement. The plan committee maintained that the plan is a “top hat” plan for purposes of ERISA and therefore exempt from the vesting and non-forfeiture provisions of that law. Sikora then filed the lawsuit.