Factors in Choosing the Top-Hat Group

Determining Who is in the Select Group

In today’s market there is a strong focus to recruit, retain and reward your key executives.  To accomplish this, companies are implementing Top-Hat plans known as Nonqualified Deferred Compensation (NQDC) plans that are “unfunded” and maintained by the employer.  Top-Hat plans are exempt from the Employee Retirement Income Security Act of 1974 (ERISA) and given to the company’s key executives. These plans are focused on a small group of individuals who are “highly compensated”.  According to the IRS, for qualified plans a highly compensated employee is one that has an income of $130,000 (2020).

The question for many companies is how to determine who falls in this select group of management. What makes this even more complicated is that ERISA provides no specific definitions of “select group”, “management” or “highly compensated employees.”  There have been court cases that have helped to provide a framework on who may be considered, which are discussed below.   

The factors to consider when selecting the group are both qualitative and quantitative, and include the following:

  • Compensation: Employees who are making more than double other employees are found to be in Top-Hat plans. Typically, when the difference between plan participants’ average salary and the average salary of employees is significant the plan is viewed more as a top-hat plan. In the case of Belka v. Rowe Furniture Corp. (571 F. Supp. 1249, D. Md. 1983), the average salary of the participant was three to four times that of the company average.
  • Participation: According the Journal of Financial Service Professionals, “a plan offered to as many as 18.7% of employees was too broad to be a Top-Hat plan, but a plan offered to as many as 15.34% was considered a Top-Hat plan.” This was evident in the case Darden v. Nationwide Mutual Insurance (717 F. Supp. 388 (E.D.N.C. 1989), where the plan was offered to the insurance agents who executed the standard agent contract, which ended up being 18.7%, and was considered too large. This is compared to the case of Demery v. Extebank Deferred Compensation Plan (B) (216 F. 3d 283, 2d Cir., 2000), where 15.34% were covered, and it was considered an acceptable size for a select group.  Some reports say that 10-12% of the workforce is a more select group.
  • Positions: The type of positions and titles the individuals carry influences who is considered to be in a Top-Hat Plan. Generally accepted job titles include vice presidents and above, and in some cases, directors, assistant vice presidents and managers. In Demery v. Extebank, plan participants had various titles, but the plan was still limited to high valued employees and showed that even though it covered many titles it was still a select group.
  • Power and Influence: Those individuals that have power to influence the decision-making process and have more power to negotiate their benefits are considered to be Top-Hat status. These individuals also have a knowledge of the company’s finances.  Employees who do not manage, have little ability to negotiate benefits and pay or have no top-level responsibility, are generally not includable in a Top-Hat plan.

There are many benefits to providing your top management with a Top-Hat plan, both for the employee and employer. Executive Benefits Network can play an important role in selecting a plan design and suggesting who can be included in a Top-Hat plan.