Understanding Top Hat Plans

November 8, 2018

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Executive benefits consulting firm, Fulcrum Partners LLC, is pleased to distribute this AALU Washington Report to its clients and friends. You can read the full report here or download it as a PDF:  Top Hat Plans.

This continuing series of articles is intended to provide deep insight into trends, events, and issues that impact the design and operation of nonqualified executive benefit plans.

Top Hat Plans What Are They and How Do You Know If You Have One


Recent case law continues to highlight the challenges, and lack of clear guidance, in identifying a company’s “top hat” group, but some common practices can be considered. As the court cases demonstrate, making sure you identify your top hat plans and appropriately limit eligibility in those plans can be important to avoiding significant litigation risk or ERISA (The Employee Retirement Income Security Act of 1974 ) fines.


Nonqualified deferred compensation plans (NQDC), such as 401(k) restoration plans, other elective deferral plans, and supplemental retirement plans (SERPs), must limit their eligibility to a “top hat” group to avoid significant problems under ERISA and the Internal Revenue Code (IRC). ERISA defines this group as a “select group of management or highly compensated employees.” Department of Labor (DOL) guidance and case law conflict as to what this definition actually means. The absence of controlling guidance has led the courts to interpret this phrase in different ways. Ultimately, while there is no bright-line test for identifying a top hat group, certain common practices around limiting eligibility should help manage the risk of claims.


ERISA fines and legal fees are no joke. Employers should review their benefit plans to determine which ones need to be limited to their top hat group, and then ensure that the eligibility requirements for those plans fall safely within the standards provided by the courts.

DISCLAIMER This information is intended solely for information and education and is not intended for use as legal or tax advice. Reference herein to any specific tax or other planning strategy, process, product or service does not constitute promotion, endorsement or recommendation by AALU. Persons should consult with their own legal or tax advisors for specific legal or tax advice.

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