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This past January, the U.S. Government Accountability Office (GAO) published its initial findings after conducting a review of executive retirement plans, specifically, top hat plans. The study came in response to a request filed by U.S. Senators Ron Wyden (Oregon), Bernie Sanders (Vermont), and Patty Murray (Washington).
This article looks at 1.) the GAO’s report; 2.) the final rulings by the U.S. District Court in the class action lawsuit of Berry v Wells Fargo & Co; and, 3.) the implications of both on Top Hat plans in general.
The U.S. Government Accountability Office’s Report on Executive Retirement Plans
Responding to the request of the three Senators, the GAO examined executive retirement plans, which it defined within the report as:
“…unfunded retirement-related nonqualified deferred compensation plans sponsored by taxable private sector companies primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees, commonly referred to as “top hat plans.”
The report, titled “Private Pensions: IRS and DOL Should Strengthen Oversight of Executive Retirement Plans,” relied on research from the Main Data Group[i] (MDG) a resource described as, “an executive compensation benchmarking company.”
The findings of the report are issued as recommendations only, however these recommendations could lead the Department of Labor (DOL) to tighten its definition of Top Hat plans in the future. Presuming it would add clarity, plan sponsors and participants would welcome a refined definition of a Top Hat plan.
Any forthcoming definition of Top Hat plan rules or guidelines should not impact the vast majority of plans in existence if the plan sponsor was, or is, working with experienced executive benefits consultants who have traditionally used conservative definitions of Top Hat plan guidelines.
At Fulcrum Partners, we regularly assist plan sponsors with in-depth review and evaluation of their Top Hat plan compliance.
Top Hat plan sponsors who do run into challenges may do so because they elected to work with consultants who did not ensure that they (the plan sponsor) received a solid opinion from outside counsel and that that counsel would be at the ready to defend the plan’s position if it was ever challenged.
- You can read the full GAO report here: Private Pensions: IRS and DOL Should Strengthen Oversight of Executive Retirement Plans, along with the report’s recommendations to the IRS and the DOL that are outlined below.
Berry v Wells Fargo & Co
Top Hat plans typically function without problems and in the way they are intended. A conservative and strategically designed Top Hat plan provides tax deferral and potential tax relief to the valued key executives on which an organization depends.
In the case of Berry v Wells Fargo & Co., a lawsuit filed nearly three years ago, and settled last month, United States District Court Judge Joseph F. Anderson approved a $79 million class action settlement. Robert Berry retired from Wells Fargo after twenty years, then started his own financial firm. As the named plaintiff, Berry alleged that he and others did not receive money owed to them under a performance award contribution and deferral plan of which their employer, Wells Fargo, was a sponsor. Berry alleged that the plan was, under ERISA[ii], a pension plan, but not a Top Hat plan.
Of the $79 million settlement, nearly $20 million was allotted for attorney’s fees. Although Berry is stated to have forfeited approximately $200,000 when he left Wells Fargo and later launched his own financial practice, he along with other class members received approximately $31,000 each in the settlement. As named plaintiff, Berry also received an additional case contribution award of $10,000.
Arguably, neither organizations nor executives benefit from time and resource draining litigation, where one could reasonably make the case that no one wins except perhaps the attorneys. Top Hat plan sponsors and plan participants are well served to work with trusted advisors and ensure their plan is thoroughly vetted and benefits both the employer and the executive.
- Read Recent Settlement Highlights Risks Associated with Top Hat Plans, a WRMarketplace AALU/GAMA Washington Report whitepaper that takes a deeper look at the relevant issues of Berry v Wells Fargo & Co.
Where Things Currently Stand: GAO Recommendations for Executive Action
Lastly, consider the GAO’s report and the executive action recommendation that included one recommendation to the IRS and three to the DOL. These are:
Recommendation to the Internal Revenue Service
- The IRS Commissioner should develop specific instructions within the Internal Revenue Manual, the Nonqualified Deferred Compensation Audit Techniques Guide, or other IRS training material to aid examiners in obtaining and evaluating information they can use to determine whether there exists a restricted period with respect to a company with a single employer defined benefit plan and if a company with a single-employer defined benefit plan has, during a restricted period, set aside assets for the purpose of paying deferred compensation under an executive retirement plan.
Recommendations to the Department of Labor
- The Secretary of Labor should review and determine whether its reporting requirements for executive retirement plans should be modified to provide additional information DOL could use to oversee whether these plans are meeting eligibility requirements.
- The Secretary of Labor should explore actions the agency could take to help companies prevent the inclusion of rank-and-file employees in executive retirement plans and determine which, if any, actions should be implemented.
- The Secretary of Labor 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 executive retirement plans, and should coordinate with other federal agencies on these instructions, as appropriate.
And while these recommendations may lead to the development of valuable guidelines for employers and their highest paid executives, at this point, they are only suggestions.
Fulcrum Partners is available to review or advise on Top Hat plans and other deferred compensation strategies.
#tophat #tophatplan #fulcrumpartners
[i] Main Data Group, a source we also rely on at Fulcrum Partners, compiles its data from the proxy statements of publicly traded companies, where organizations are required by the Securities and Exchange Commission (SEC) to disclose information concerning the amount and type of compensation paid to their chief executive officer, chief financial officer, and the organization’s three other most highly compensated executive officers. The data covered by the GAO report spans a period from 2013 to 2017 and represents what was considered to be the most timely and reliable compilation of data available.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any tax advice contained herein is of a general nature. You should seek specific advice from your tax professional before pursuing any idea contemplated herein.
Securities offered through Lion Street Financial, LLC (LSF) and Valmark Securities, Inc. (VSI), each a member of FINRA and SIPC. Investment advisory services offered through Lion Street Advisors, LLC (LSA) and Valmark Advisers, Inc. (VAI), each an SEC registered investment advisor. Please refer to your investment advisory agreement and the Form ADV disclosures provided to you for more information. VAI/VSI and LSF/LSA are non-affiliated entities and separate entities from OneDigital and Fulcrum Partners.
Unless otherwise noted, VAI/VSI, LSF/LSA are not affiliated, associated, authorized, endorsed by, or in any way officially connected with any other company, agency or government agency identified or referenced in this document.
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