Examining Top Hat Plan Participation and Reporting …

Advisory Council on Employee Welfare and Pension Benefit Plans

Report to the Honorable Eugene Scalia, United States Secretary of Labor

Examining Top Hat Plan Participation and Reporting

December 2020

ERISA Advisory Council

December 2020

NOTICE

This report was produced by the Advisory Council on Employee Welfare and Pension Benefit Plans, usually referred to as the ERISA Advisory Council (the "Council"). The Council was established under section 512 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") to advise the Secretary of Labor (the "Secretary") on matters related to welfare and pension benefit plans. This report examines issues arising in connection with unfunded, nonqualified deferred compensation plans covering a "select group of management or highly compensated employees" (commonly referred to as "top hat" plans).

The contents of this report do not represent the position of the Secretary or of the Department of Labor (the "Department").

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ERISA Advisory Council

LIST OF COUNCIL MEMBERS

Glenn E. Butash, Council Chair David J. Kritz, Council Vice Chair Jason K. Bortz, Issue Chair Marcy L. Supovitz, Issue Vice Chair John R. Harney, Drafting Team Member William B. Johnsen, Drafting Team Member Bridget O'Connor, Drafting Team Member Peter J. Wiedenbeck, Drafting Team Member Lisa C. Allen David M. Blanchett Julie A. Curtis James G. Haubrock Linda M. Kerschner Tearyn J. Loving Andrea T. Sellars

December 2020

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ERISA Advisory Council

December 2020

ABSTRACT

The 2020 ERISA Advisory Council examined the ERISA carve-outs for unfunded, nonqualified deferred compensation plans covering a "select group of management or highly compensated employees" (commonly referred to as "top hat" plans) and the alternative reporting option for such plans.

Sections 201(2), 301(a)(3), and 401(a)(1) of ERISA provide an exclusion from the requirements of Parts 2, 3 and 4 of Title I of ERISA (pertaining to participation, vesting, funding and fiduciary responsibilities, respectively) for "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." Under a regulatory exemption under Part 1 of Title I of ERISA (reporting and disclosure), an employer maintaining a top hat plan is also exempt from all ERISA reporting and disclosure requirements if the employer utilizes an alternative reporting option requiring the filing of a one-time registration statement with the Department of Labor that identifies the employer, the plan administrator and the number of plans the employer maintains, and certifies that the plan only covers a select group of management or highly compensated employees.1

The Department has not published formal guidance in this area but its long-standing view is 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.2 In addition, the Department has not addressed the eligibility criteria for appropriate inclusion of employees in a top hat plan, for example, the types of jobs, roles, salary levels, access to information, or sophistication that are necessary to influence plan terms. Additional approaches to defining eligibility may also be worthy of consideration.

1 29 C.F.R. ? 2520.104-23. 2 See DOL Advisory Opinion 90-14A (May 8, 1990).

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ERISA Advisory Council

December 2020

In January 2020, at the behest of three U.S. Senators, the U.S. Government Accountability Office ("GAO") published a report on top hat plans titled "Private Pensions: IRS and DOL Should Strengthen Oversight of Executive Retirement Plans."3 The Report recommended that the Department determine:

? whether its reporting requirements for top hat plans should be modified to provide additional information;

? whether employers are inappropriately including rank-and-file employees in top hat plans; and

? whether the Department should provide specific instructions for companies to follow to correct eligibility errors that occur when rank-and-file employees are found to be participating in top hat plans.

The 2020 Council's objective in reviewing top hat plan participation and reporting was to determine whether guidance is needed to define a "select group of management or highly compensated employees" and whether enhanced reporting would be helpful and appropriate.

3 GAO-20-70 (Jan. 2020).

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