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Select group of management or HCE's


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Is there an interpretation out there as to whether a NQDC plan should be offered to a select group of HCE's or just to HCE's. the issue here is my client wants to offer the plan to all HCE's and I dont want them to run afoul of the exemption from having to comply with ERISA.

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DOL official position is that HCE definiton under ERISA is not congruent with HCE under IRC for top hat plan eligibility. However the DOL has refused to issue regs on this issue for 20 years because there is 0 legislative history on what congress intended by the defintion of highly compensated ee or a select group of management. There are several dol rulings and cases that describe the top hat group as consisting of the top 2, 3 or 4 % of employees by salary or job title in order to be a select group. But there is no bright line test. Prior to 1997 some employers offerred top hat eligibilty to every employee who was in the super hce group or about $100,000. Some lawyers recommend a $150,000 or the a17 limits as the cut off but that is only a guideline if the employer is located in a large metro area. Many employers pay their ceos/cfos less than $150k a year and would be regarded as members of the top hat group. In some financial institutions 20% or more of the ee make over 200K and negotiate their own employment terms and no one knows until the end of the year what their bonus will be.

mjb

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K : Based upon what authority---? I know employers that limited the t/h plan to hces because there were so few in preportion to the non hces. There are ers where all hces are less than 5% of the total ees. The problem with the T/h plan exemption is that it is completely idiosyncratic. There can even be a t/h plan for an employee who is not an hce, e.g, in a non profit where the director or ceo makes less than $85k a year.

mjb

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it is clearly a muddled area so i dont have authority on point. however, it would seem to be imprudent to offer it to anyone merely because they are an HCE. this is not a "select" group and would seem to be disciminatory over the NHCE's that do not get the opportunity to participate.

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Neither prudence nor nondiscrimination are applicable to a top hat plan. Many small employers cannot afford to sponsor a qualified plan for all employees but need to retain top management. Therefore counsel will advise of the availability of the t/h exemption. Since there is no definiton of "select group" under the statute it is within the employer's descretion to define such a group-- In most corporations only a handful of employees make over 85k. By definiton a t/h plan can be limited to a select group of highly compensated employees.

mjb

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maybe in your world prudence is not applicable. i don't know how you can say that it is not. the standards are far from clear in the area. although the Extebank case does seem to indicate that a plan offered to up to 15% of the employer's workforce can still qualify. the case can be found at 216 F.3d 283 for those interested.

Moreover, i disagree with you about the type of client that uses a top hat plan. i would venture to say i far greater amount are used for executive deferred compensation and used in addition/in connection with a 401(k) or other qualified plan.

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Prudence is not the operative term because the design of a t/h plan is a settlor issue - not a fiduciary decision. While you are correct in that most t/h plans are established by large corporations for senior exec-- there is nothing in the law which makes it inappropriate or illegal for a small employer to establish a t/h plan for one or two HCEs or for a select group of senior mgt who are hces. Therefore there can be no regulation which discriminates against small employers who establish such plans in lieu of a qualfied plan. Under your analysis a small employer who has not established a retirement plan should refrain from establishing a t/h plan because it discriminates against NHCEs while large employers can establish them because they maintain qualified plans for the NHECs. Last time I looked ERISA does not contain any nondiscrimination provisions. The fact that the DOL has not issued any regulations in 28 years is an indication that it does not have a clue of how to define these plans and will leave it to the courts.

mjb

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that was not even close to my analysis. my point in mentioning discimination was that insofar as the plan is made available to a select group of employees you will not have to comply with Title I of ERISA. If you don't have to follow title I it only follows that you do not have to follow the applicable IRS code and regs relating to qualified plans. however, if you allow too many people into the plan you will have to abide by all the applicable discimination rules which you will not likely satisfy. hence, my point - the plan will be discriminatory and will not qualify as a top-hat plan.

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Huh? there is no requirement that t/h plans must conform to IRS nondiscriminaton rules after covering a certain number of employees. Some t/h plans of fortune 100 companies cover hundreds or thousands of employees. Or are you saying that covering too many people will require that the plan be submitted as a qualifed plan to the IRS?

mjb

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why is it so difficult for you to understand? if you fail to qualify for the top hat exemption you are an ERISA plan. moreover, your plan is an ERISA plan that is not in compliance with ERISA. that would be the worst case scenerio but it would be a bad situation nonethless.

also,you are oversimplifying the issue of the amount of people covered. it has nothing to do with the number of people per se and i never said it did. it is the number of participants as they relate to the total workforce.

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but the determinaton of whether it is a t/h plan is not based on the number of employees who participate in the plan. It is always a question of whether the plan is limited to a select group of management or hces- whether there in one participant or a thousand participants.

mjb

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look i started the thread by asking if anyone knew what was meant my a select group. i have since found a case that says it can be as high as 15% of the total workforce. all i am saying is if you allow too high of a percentage in to the plan you will lose the top hat exemption. it seems to be the result would be that you would have plan that would have to comply with ERISA.

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but too high a percentage is too vague a term in the real world. For example a corporation could establish a separate subsidiary with 2 employees -a president who makes 300k a year and a secretary who makes 40k a year. The employer could establish a top hat plan for the pres only even though 50% of the employees are participants in the t/h plan.

mjb

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Guest EAKarno

Several points need to be made here:

1. A failed top-hat plan will NOT be subject to non-discrimination requirements. It will, however, be subject to full reporting and disclosure, minimum participation, minimum vesting, funding, and fiduciary standards. The funding will kill the tax deferral so it is still a bad result to fail the top hat requirements

2. Do not confuse the Code's definition of an HCE with that under ERISA's top hat requirements. Both the IRS and DOL have indicated that they are not the same.

3. In determining a "select group" the courts have typically applied a fraction in which the numerator is the number of eligible employees and the denominator is the entire workforce. The larger the denominator, the smaller the fraction should generally be. There is no hard rule as to what the fraction should be. Some will say that 5% is safe, but that may well be too large at say Wal-Mart. You will also sometimes hear that 20% is too high, but what about the two person company that MBozek alludes to?

4. The only DOL guidance as to what constitutes a top hat participant is found in an Opinion that states that certain individuals by virtue of their position or compensation level have the ability to negotiate or otherwise influence the design and operation of their deferred compensation and therefore do not need the protections of Title I of ERISA.

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i think that clears up everything in addition to earlier posts and the research i did this morning . with respect to the non discrimination point, if you all say it does not apply, i will take your word for it. but as you stated it would be a bad result nonetheless.

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