3rd Circuit analyzes "Top Hat" exemption under ERISA.
The 3rd Circuit Court of Appeals recently had occasion to examine what constitutes a "top hat" plan under ERISA. In re IT Group, Inc., 2006 WL 1421016 (3rd Cir. 2006). These deferred compensation plans are subject to ERISA's administrative and enforcement provisions, but exempt from the substantive provisions that regulate plan funding and impose fiduciary duties.
The Court noted that ERISA defines a top hat plan as "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." The primary question before the Court in IT Group was what constitutes an "unfunded plan."
The Court stated that a plan is "unfunded" where the employer promises to pay the employee the deferred compensation at a specified time, but does not set aside the funds in an escrow, trust fund, or otherwise. In such a case, the assets used to pay the deferred compensation are the general assets of the employer and are subject to the claims of the employer's creditors. However, an employer may set aside deferred compensation amounts in a segregated fund or trust without jeopardizing a plan's "unfunded" status if the fund or trust remains "subject to the claims of the employer's creditors in the event of insolvency or bankruptcy."
Ultimately however, the 3rd Circuit found that the test for determining what constitutes unfunded status was largely undefined and a matter of first impression. The Court settled on the following two elements: (1) whether beneficiaries of the plan can look to a res separate from the general assets of the corporation to satisfy their claims; and (2) whether beneficiaries of the plan have a legal right greater than that of general, unsecured creditors to the assets of the corporation or to some specific subset of corporate assets. The Court also stated that it may also consider the plan's intended and actual tax treatment.
Applying these elements, the Court found that the Plan at issue was, indeed, an unfunded "Top Hat" plan under ERISA and therefore not subject to its substantive provisions.
Read the entire opinion here.