Who can be a participant in a top hat plan?

[Guest LDH1]

Can 2 key employees of a non-controlled group entity be included in a top hat plan sponsored by the entity owning 50% of the non-control group entity?

[Guest EAKarno]

Yes

Nonqualified plans may cover employees as well as nonemployees. Whether the two "key employees" are actually employed by the plan sponsor is not relevant to whether they can participate. If the arrangement is funded with a rabbi trust, however, some tax issues MAY arise.

[pjkoehler]

One thing to keep in mind is that you don't need the "top hat" plan exemption if you don't have an ERISA Title I Plan. One approach would be to clone a separate plan for the nonemployees of the sponsoring employer's controlled group. A plan in which no employees participate is not an employee benefit plan in the first place and is not covered by ERISA. On the other hand, if the concentration of nonemployees as a percentage of total partcipants is very small, this would probably be overkill. Nonetheless, in theory, allowing nonemployees to participate in the same plan with the employees creates a tension with the exemption requirement that the plan be "primarily for the purpose of providing deferred compensation for a select group of management and highly compensated employees." While the DOL hasn't issued much guidance in this area, you'll want to watch the nonemployee concentration percentage as a measure of whether the plan is "primarily for" the select group of employees.

[Kirk Maldonado]

Being exempt from ERISA is not always a blessing. That means that you are subject to State law. Being subject to California law (e.g., punitive damages) can be much worse than anything that can happen to you under ERISA.