How does one count the number of employees for purposes of a top hat exemption filing?

[Guest FAQ]

A top hat filing with the DOL must disclose the number of top hat plans "and the number of employees in each plan." Reg. §2520.104-23(b)(1).

Question: does the number of employees refer to the number that are eligible to participate, or just the number who elect to participate?

For example, if 25 employees are offered the opportunity to defer compensation into a nonqualified plan, but only 10 elect to do so, does the company report 25 or 10 as the number of employees in the plan when filing the top hat exemption?

[Mark Whitelaw]

As a former NQDC TPA we were advised by counsel to report those electing to participate. In your example, 10.

[KJohnson]

What is the practice for updating thse filings. Let's say you add pay someone out. Do people go in and amend the number. I had an informal conversation with DOL and they said that you should.

[mbozek]

Where does the reg require updating? Paragraph (b)(2) states that only one notice needs to be filed by each employer maintaining one or more plans.

[Mark Whitelaw]

We had been advised the filing was only needed at the time the plan was initially offered. But, we did amended the filing if the plan was opened to another management group just to be on the safe side. We also did it if there was a company merger where an exisiting manangment group was expanded significantly. Otherwise, normal turnover kept the total number close to the original filing.

[KJohnson]

mbozek--That's what I always thought as well. When there was a payout, someone asked me the quesiton. I said I couldn't imagine that we had to amend the filing but I would just call to make sure. I called Canary's number at DOL and someone called me back a couple days later--I've forgotten the name of the person and said that while you only filed one statement, that statement needed to remain accurate. Like you, I am not sure this is consistent with the regs and I can't imagine any enforcement in this area.

[mbozek]

Requiring that the notice be updated for a change in the nuumber of participants is not consistent with the reg which requires that the notice shall be filed within 120 days after the plan become subject to ERISA without any requirement that it be updated.

[E as in ERISA]

My recollection is that the DOL expects there to be caps on the percentage/number of employees in a company that are considered to be within the "select group of management or highly compensated employees." If I recall correctly, it expects that a "select" group will not be more than about 15 percent of the employees or 50 (75?) total individuals. (If anyone has a better memory, please correct these). I don't know what purpose the number on the top hat filing is used for. But if DOL steps up enforcement on NQ like the IRS has, then it might be a good idea to make sure that you're not exposing a violation of these rules by reporting a large number.

[KJohnson]

I don't think DOL has a hard and fast rule, here is a Q&A from the last ABA session in April '04:

Question 2: In light of recent case law and existing business practice with respect to nonqualified deferred compensation plans for executives and management employees and other highly compensated employees, what are the DoL’s current views regarding the definition of a “top hat” group and will the DoL issue guidance to clearly and appropriately reflect a more practical approach to defining a top hat group?

Proposed

Answer 2: It is noted that practitioners and employers do not have clear, workable

guidance from the DoL regarding the definition of a top hat group. The DoL’s most recent pronouncement in this area, Advisory Opinion 90-14A (5/8/90) which is now almost 14 years old, takes an extremely restrictive and truly unwarranted pproach to the determination of a top hat group by focusing on whether an eligible participant has the ability to influence the terms of his or her compensation. See also DoL Adv. Op. 92-13A (5/19/92) (reaffirming the standard established in Adv. Op. 90-14A for determining whether a top hat group exists). This DoL guidance is to be contrasted with two more recent court cases (note: it would appear to be impossible to reconcile this DoL guidance with these two cases). In Demery v. Extebank Deferred Comp. Plan, 216 F.3d 283 (2d Cir. 2000), a top hat plan was

found even though it covered over 15% (i.e., 15.34%) of the employer's employees and where the compensation of some of the eligible employees was relatively low. In In re: The IT Group, Inc., 2004 WL 226041 (Bankr. . Del.), a top hat plan was also found where the plan covered management mployees below the level of executive and employees whose base annual salary was at least $100,000.

DoL

Response 2: The Department expressed the view in Advisory Opinion 90-14A (May 8,1990) that, in providing relief for “top hat” plans from the broad remedial provisions of ERISA, Congress recognized that certain individuals, by virtue of their position or compensation level, have the ability to affect or substantially influence, through negotiation or otherwise, the design and operation of their deferred compensation plan, taking into consideration any risks attendant thereto, and, therefore, would not need the substantive rights and protections of Title I. There is no initiative underway at the Department to reexamine the AO in light of the cases cited in the question.