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What penalties are imposed when a top hat plan is deemed to have faile


Guest nmh

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What penalties are imposed when a "top hat plan" is deemed to have failed and is no longer considered a top hat plan?

Also, what rights, if any, do other employees (who were not part of the "select group" in the plan) have against the employer since the "top hat plan" is no longer deemed such a plan?

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Guest EAKarno

If a court should determine that a nonqualified plan is not a top hat plan, then the plan will be fully subject to Title I of ERISA which will require:

- Full reporting and disclosure

- Formal funding which will likely destroy the tax deferral aspect of the plan

- Minimum vesting standards

- ERISA fiduciary liability

The plan will NOT be subject to minimum participation or non discrimination requirements. Thus, the excluded employees will have no recourse whatsoever against the employer based upon the fact that the plan is not top hat.

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Other than being subject to Title I of ERISA, would there be any penalties imposed on the plan/employer? For instance, if the top hat plan was deemed to cover employees other than a "select group", other than the plan losing its exemption and being subject to Title I, what type of penalties would be imposed?

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There are penalties, in general, that could apply for failure to file a form 5500. Penalties would include IRS 6652(e) penalty for failure to file the Form 5500 required under Title I. $25 per day up to $15,000 max. The DOL also imposes a penalty under ERISA section 502©(2) for failure to provide annual information. The DOL can assess a maximum penalty of $1,100 per day; however, the DOL has announced in its penalty assessment program that nonfilers generally will be assessed a penalty of $300 a day (accruing up to $30,000). Both penalties could be waived if you provide a written statement setting forth "reasonable cause."

Because you have a top-hat plan, I do not think the IRS penalties apply. Your plan is not qualified under 401(a) and I assume it is unfunded. The DOL penalty could apply, on the other hand. However, in your case, wouldn't it be advisable to just file a Form 5500 for the plan in the year of the failure? If your plan was a valid "top hat" plan in past years, I can't see how the DOL can assess the penalties mentioned above. If what you mean to say is that the plan was NEVER valid as an exempted top-hat plan, then the penalties could apply. Of course, if you still have a copy of the exemption letter you sent, I would attach it to the written statement setting forth reasonable cause as it clearly shows your attempt to comply with applicable laws.

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