Court Orders Trial to Determine Plan's Top Hat Status

The U.S. District Court for the Southern District of Texas has determined there is inconclusive evidence regarding whether or not a wealth accumulation plan (WAP) offered to executives of RBC Capital Markets Corporation is a “top hat” plan, exempt from certain Employee Retirement Income Security Act (ERISA) provisions. Since the issue was not clear, the federal court said the case must move to trial.

U.S. District Judge Keith P. Ellison noted in his opinion that a top hat plan is an ERISA plan that is unfunded and maintained “primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees.” While the WAP document itself contains this language, it is not dispositive under the law, Ellison said.

The parties agree that the WAP is unfunded, and it is clear that deferred compensation is provided under the plan. So, the dispute before the court is whether the primary purpose of the plan is to provide deferred compensation for a select group of management or highly compensated employees.

The plaintiffs contend that RBC’s promoting, marketing and use of the WAP as an employee recruitment and retention tool overshadowed the deferred compensation benefits it provided. But, Ellison said, the plaintiffs’ argument is not supported by applicable legal authority. RBC provided evidence that the WAP, from inception, was designed to “constitute an unfunded plan of deferred compensation maintained for a select group of management or highly compensated employees and, therefore, [is] exempt from many ERISA requirements.” According to Ellison, this evidence does not entitle RBC to summary judgment on the top hat issue, but raises a genuine issue of material fact regarding the primary purpose of the WAP for purposes of the top hat exemption.

The parties agree that qualitative and quantitative elements are involved in the determination of a plan’s selectivity, but they disagree as to the parameters and necessary proof of those elements. The parties further disagree as to whether “substantial influence” is an element of the selectivity factor.

In a 1990 Department of Labor (DOL) opinion letter, the agency 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 [of ERISA].”

The plaintiffs argue that this substantial influence requirement is an independent top hat factor that defendants must establish as a matter of law for each individual plaintiff. However, Ellison noted, neither of the previous courts that considered the issue squarely held that the "substantial influence" element of DOL Letter 90-14A must be considered and met when establishing the validity of a top hat plan. “Consequently, it is not readily clear whether the issue is an additional consideration for the courts in determining the selectivity issue, or whether it stands as an additional factor requiring separate analysis,” Ellison wrote.

He found that by arguing that they themselves did not have substantial influence over the WAP, plaintiffs do not establish entitlement to summary judgment. In addition, RBC does not show they are entitled to summary judgment, as they have not shown that a significant number of WAP participants individually had the required bargaining power.

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.

The case was brought by former plan participants who had portions of their WAP accounts forfeited when they left their jobs at RBC. The plaintiffs alleged the forfeitures were violations of ERISA. But, the District Court ruled that the plan was not an ERISA plan because its purpose was not to provide retirement income. On appeal, the 5th U.S. Circuit Court of Appeals ruled the WAP is an ERISA plan and remanded the case back to the District Court to determine if it is a top hat plan.

The opinion in Tolbert v. RBC Capital Markets is here.