Top Hat Group

[Christine Roberts]

Can a very small company still have a top hat group? An employer with 4 full time employees (increasing seasonally to approx. 8) wants to put in a NQ deferred comp. plan for the key employees - the salesperson and the fulfillment person - who essentially run the company and earn more than the rest. However as a percentage of total employees this group is no where near the 5% safe harbor. Seeking any comments from persons with experience in similar matters.

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[IRC401]

Does the owner of the company understand the tax consequences to him of the NQDC plan (i.e., the deferred tax deduction)?

With a small company there are often ways to use a qualified plan instead of a nonqualified plan. Have they considered all of the options?

[Guest LRichey]

In a company this small it might be more attractive to consider manipulating a split dollar arrangement for it's cash accumulation features, plus get some useful death benefit inexpensively for the participant as a bonus of the arrangement. This approach has the advantage of administrative simplicity, security for the benefit (use the collateral assignment format if this desired), and individualized plan design flexibility for each participant.

General "Top Hat" guidedance is not very helpful for small companies since most case and DOL authority has been big plan oriented. Carefully document the "select management" status of the participants on Board resolutions if an NQP or split dollar is used.