Non-qualified 401(k) Top Hat Plan.

[Guest Bill55]

We have extablished a Top Hat Plan for Highly Compensated Employees (current $85,000). Earnings on participants contributions are mirrored from the qualified 401(k) Plan. The Top Hat Plan covers less than 5o employees out of over 3,000 employees. Is anyone out there maintaining a similar unfunded (compnay retains plan assets)plan?

[Kirk Maldonado]

Hopefully, nobody else is doing that. It is very clear that this does not work. You can't put people only making $85,000 in a top hat plan. That is very agressive.

[MWeddell]

To amplify the above comment, certainly < 50 / 3000 is a low percentage to be considered as the top hat group if one looks back to those old DOL rulings before it stopped ruling on that issue.

However, there's a remark in early 1990's prefatory discussion to 414(q) proposed or final regulations (yes, that's a vague cite, but it gives you enough to look it up if you want to pursue it) that specifically says that the DOL told the IRS that IRC 414(q) definition can't be used to define the top hat group. Granted, the indexed amount jumped from $66K to $80K since that remark, but it'd still be aggressive.

[This message has been edited by MWeddell (edited 01-03-2000).]

[Kirk Maldonado]

To amplify the remark by MWeddell, the percentage of the total employee population that is covered isn't determinative; you must also look at the dollar amount of compensation. Few knowledgeable ERISA professionals feel comfortable covering individuals whose base salary is less than $100,000. Inasmuch as that amount has been used for many years (without any informal indexing), I have some doubts whether it should still be used.

[Guest Destruo]

Not only is compensation significant, but also the individual's position. In DOL Adv. Opinion 90-14A, the DOL referred to the top hat group as "certain individuals, [who] 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..."

[Guest]

I think the point is the group that you're covering; top hat is not just based on salary but whether the participant is in a position to understand the risks of an unfunded plan. And I think there are plenty of employers that use less than $100,000 as a base salary. It really depends on how agressive you want to be as long as you can defend the group to the IRS.

[IRC401]

You don't need to defend your position to the IRS or even the DoL. The DoL audit risk is miniscule. On the other hand, the more people in the group, the more likely that someone (including former employees, ex-spouses, and who knows who else) will sue some day asserting that the plan is an ERISA plan. If a court holds that the plan is not a valid top-hat plan, then the assets need to go into a trust, which would be a secular trust, and everything that isn't subject to a substantial risk of forfeiture becomes immediately taxable. My advice is to consider all of the long range litigation possibilities before being that aggressive.

[Guest NFalci]

Bill55- Please contact me about your Top Hat Plan. I was unable to link to your email. We are researching the topic as well. I can be reached at nfalci@arc-ag.com or 703-754-5442.

Thanks, Nina Falci, CEBS

Sr. Benefits Analyst

Atlantic Research Corp.

[Guest JCarren]

I agree that there is no safe harbor compensation limit under the ERISA top hat exemption. Many confuse the HCE limits, which has nothing to do with this issue. We have tried to structure plans to avoid ERISA entirely in many cases (i.e., by avoiding treatment as a retirement plan and limiting the deferral aspects to the vesting period.

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Jeffrey P. Carren

Laner, Muchin, Dombrow, Becker, Levin and Tominberg Ltd. 515 N State St. Suite 2800 Chicago Illinois 60610 312/467-9800

[Kirk Maldonado]

To amplify the commments by IRC401, if it isn't a valid top hat plan, you would also be liable for the penalities for failing to file a form 5500 for all of the prior years.

Also, the absence of a secular trust would probably be a violation of the exclusive benefit rule. Thus, if the employer goes bankrupt and everybody loses their benefits under the plan, the fiduciaries could be personally liable to all of the particpants for the amount of their benefits.

I certainly wouldn't want anything to do with such a plan.

[GBurns]

IRC401 the risk of DOL/IRS audit being miniscule should always be an issue. If, as you point out, any litigation is ever started the DOL and IRS will most certainly become involved and massive penalties should ensue.I suggest that no one should ignore the DOL/IRS.