Company failed to adopt top hat plan ... employees may have been told of existence of plan .... simple contract issue?

[Guest Edward McElroy]

A company received a draft top hat plan in 2001. It was never adopted and key employees never received copies of the plan or its terms (which included vesting and forfeiture provisions). Participants might have been orally told that bonuses would be paid. Of course one key employee may be terminated for cause. If top hat plan were established, benefit would be forfeited. If just an oral promise, forfeiture terms can not be imposed. Any thoughts. Thanks. Ed

[TCWalker]

Wells, sounds like oral contract & implied covenant of good faith and fair dealing but it's a facts dependent, contract issue as you've said. Just what were the promises? As far as the plan, the no writing, no formal adoption may create other problems. I would try for a fresh start.

[Lori Friedman]

Unfunded, "top hat" arrangements are excluded from ERISA's written plan requirement (see ERISA Sec. 401(a)). But, I wonder about the applicable state laws that would govern a contract between an employer and its key employees.

[Mark Whitelaw]

My prior experience as a NQ TPA was 80%-90% of existing SERPs brought to us to administer did not have a plan document, had not been filed with the DOL, the company was not accounting for it properly and participants were not receiving annual statements. The plan was a good idea posed by an insurance agent that wrote the insurance to informally fund the plan, but not experienced in setting up plans.

Point being this is a common problem, a company having to say "if we had done things right, we wouldn't owe you anything". Remember, there are no secrets. Whatever you do, the rest of the management team will hear about it. SERPs are there to help solidfy the management team behind the company, not against it. Most often we saw companies make a modest settlement to the person and quickly get the plan document finished to eliminate this issue from happening again. Since the company was effectively starting over, it was also a time for the company to re-examine the plan objectives, benefits and structure just as Tom has suggested. A lot has changed in the past couple of years and legislation pending that could change things even more.

[TCWalker]

As to Lori's post, the courts will look to the NQ/TH document to determine if it qualifies as an unfunded "top-hat" plan vs. a disqualified QPlan, funded NQPlan, or other. Additionally, a "top-hat" plan is subject to Parts 1 & 5 of ERISA Title I, so you have to take into account the special one-time filing exception of DOL Reg 2520.104-23, or think about filing 5500s back to the inception year, or seek VC relief. As I recall, the DOL also reminds you that they have the right to request copies of the top-hat plan documents, [though I recall the regs. say, "if any".]

So from a practical standpoint, not having a plan document is risking much.

[Lori Friedman]

I'm wondering if the amount of $$$ involved, absent a written contract, would violate the applicable state's Statute of Frauds.

[TCWalker]

Not a sale of goods, capable of being performed within one year.