Companies Hit By “Top Hat Plan” Litigation

Under Department of Labor regulations, a non-qualified deferred compensation or supplemental retirement plan is exempt from ERISA requirements if it qualifies as a top hat plan, defined as “a plan or plans primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees.” Because non-qualified plans that qualify for the exemption do not need to adhere to ERISA’s vesting and other provisions, it can be in the interest of a top hat plan holder to contest this classification, and indeed this definition has become the locus of a spate of litigation, according to Winston & Strawn partner Michael S. Melbinger. “Former employees who terminate employment after having satisfied the minimal vesting requirements of ERISA, but before satisfied the more restrictive vesting requirements of their former employers’ non-qualified plans,” he writes, “have figured out (actually, their lawyers have figured out) that challenging a non-qualified plan’s status as a top hat plan can be an effective way to collect additional dollars.” It’s an unsettled area of the law, but two recent federal court decisions go a long way toward clarifying it.