Skip to content

What Is A Top Hat Agreement

The Court focused on a number of issues. In the so-called « selectivity » question, that is, what a selected group of highly detreated managers or employees is, the court held that there are both quantitative and qualitative factors. In the form of quantitative factors, the Court concluded that some courts have focused on the percentage of workers covered by the scheme. For example, the Second Circuit in a 2000 case, Demery v. Extebank[2], noted that a scheme that covered 15.34% of the workforce was still a high-end scheme, although the Court noted that this percentage was probably at the upper limit or close to the acceptable size for a « selected group ». Although it does not provide definitive answers, the Tolbert Ordinance is a good summary of the existing law. The courts focus on the percentage of the workforce covered (and no court has yet gone beyond the 15.34% allowed in Demery) as well as what the Tolbert court called qualitative factors. Although no court has so far asked for evidence of significant influence, the problem remains due to the DOL`s highly cited statement. Another question that is still under discussion is whether the presence of a small number of participants who do not meet the selectivity criteria can affect the entire plan: The Second Circuit in Demery said that a small number of these employees would not interfere with the plan, but the DOL apparently continues to take the opposite position. The exception to the « high-end plan » of full ERISA coverage of an employee benefit plan is the basis for executive compensation. The exception provides that « a plan that is not funded and maintained by an employer primarily for the purpose of providing deferred compensation to a selected group of highly paid managers or employees » does not have to comply with various requirements of ERISA, in particular the default and funding rules applicable to ERISA plans. The exception applies to all types of compensation-related compensation agreements, from a single-executive contract to a program that complements a 401(k) plan for a broader range of high-level employees. There are two main types of non-covered NDC plans: defined contribution plans (or individual accounts) and defined benefit plans.

Defined benefit plans pay for a pension-like benefit, often based on years of service and/or final average salary. Often, the plan offers benefits that go beyond what can be provided under an employer`s eligible pension plan. In an individual account plan, the employee`s performance depends entirely on the value of their individual deferred compensation account. It is not a real and capital account, but an accounting account that is credited with employee carry-forwards, employer contributions and capital gains. These are often referred to as « hypothetical » or « scoring » income to reflect the fact that these are simply credits to the member`s NQDC plan account. Often, employees can « direct » the investment of their individual account. Generally, the employer (or trustee of an NQDC plan funded informally by a rabbin trust) is not required to invest the assets in the manner chosen by the member. The participant`s investment choice only controls the amount of hypothetical income that the employer wishes to credit at regular intervals to the member`s accounting account.

The IRS has suggested in the past that if the employer (or trustee) is required to invest assets in accordance with the participant`s instructions, this « dominance and control » by the participant may result in immediate taxation according to theories of constructive receipt or economic benefits. Attention: Section 409A of the IRC contains detailed rules governing the distribution of NQDC benefits. A high-end plan is a type of employer-funded plan that is not funded. The design of the plan is to provide deferred compensation to the group of eligible employees. .