Creative Solutions for HCEs

[ldr]

Good afternoon to all,

We have a prospect that has about 1800 employees, mostly in lower paid jobs, in the service industry (think restaurants as an example).  Of the 1800, only 600 would be eligible if we use 1 year of service, dual entry, age 21.  There are 12 HCE employees.  All these employees are spread out over several corporations, but they are all owned by one man, so it's a controlled group.

They have been presented a standard 401(k) plan with a safe harbor match to cover everyone and have rejected it.  What they say they want is a deferral-only 401(k) plan for the NHCEs and a separate "carve out" plan (their terminology, not mine) that benefits only the HCEs for which the company would be willing to provide a match.

We are somewhat aware of the existence of Non Qualified Deferred Compensation plans but our understanding of them is that they have so many drawbacks that they are not very popular anymore.  We don't really think that the 12 HCEs will appreciate their contributions being a general asset of the employer, being subject to taxation if they leave and take the funds, etc.  We understand that the contributions could be put into a Rabbi trust, but even then, they are still subject to the claims of creditors if the company experiences bankruptcy.  All that makes this look like a doubtful solution.

Are we missing some cutting edge, new plan design possibilities within the world of qualified plans?  How have you addressed such requests, if you can share?

As always, your comments and experiences are much appreciated.

[XTitan]

NQ plans not very popular?  Ok, I'm a little biased.  Maybe a lot.  NQ surveys I've seen say 80%-95% of respondents have NQ plans at their companies so one could say they are as popular as they've ever been; they haven't been legislated out of existence (yet).  It's true NQ plans have risks not found in qualified plans.  It's true the plans are unfunded and subject to a nonpayment risk.  It's also true that plans can be designed to provide deferral opportunities for the select group with creative match and vesting provisions.  But it does require expertise to design, implement and record keep. 

Based on the numbers of HCE, NHCE, and ineligibles, I'm guessing that if a 401(k) plan were implemented that the safe harbor contribution would be too expensive, but without it, the HCEs will be severely limited in their contributions.  If this is right, then a NQ plan can address the retirement needs for the HCEs.  But I'd prefer to see how the right qualified plan can address this first.

[jpod]

I agree that they are popular, but all of the risks which ldr outlined do often scare people away from contributing their own money to a NQ plan, and rightly so in my opinion.  Then again, the more generous the match, the more enticing it becomes and could convert someone from being risk-adverse to a risk-taker.  For example, if it's $.25 on the $1.00 subject to a vesting requirement, not so generous; but $1.00 on the $1.00 without a vesting requirement, maybe so.  Also, note that just because someone is an NHCE doesn't mean necessarily that he/she is a member of the requisite "top hat" group.     

[ldr]

Hi XTitan and jpod,

Thank you both for your observations.  I shouldn't have said that NQ plans are not popular without checking further.  We were just told this on the phone by an ERISA attorney who said he hasn't had to write a document for one in years and that they had fallen out of favor.  That's just one person's perspective and we should have looked further.

XTitan, can you explain more about what you mean when you say that you would prefer to see the right qualified plan address this first?  To our knowledge, what we have here is an employer who wants to offer everyone except the select group of 12 HCE employees a deferral-only plan (which will largely go unused but whatever).  The employer apparently wants to be able to say that he has a 401(k) plan when hiring people but doesn't want to make any employer contributions to it.  Then for the 12 HCE employees, he wants a separate plan, to which he will make a match of some sort but we don't yet know how much that will be.

jpod, I like your idea about a match so rich that the 12 HCEs could overlook the hazards of a NQ plan.

If you have a suggestion as to how to accomplish what they want using only qualified plans, we'd appreciate more details.

Thank you both in advance.

[Mr Bagwell]

ldr,

From a Qualified plan perspective,  IMO, the Safe Harbor Match is the only viable option that would even motivate me to want to have this plan.  (To each his own, I'm not judging)   A non safe harbor plan for the HCEs will be a disaster because the NHCE numbers will kill the potential for any substantial HCE deferrals.  So you would have HCEs not getting to defer much, and the NHCEs aren't deferring much.  Add on top of that 1800 employees to track for census. 

Any chance the one owner will defer to the plan?  I would hate for the plan to somehow go Top Heavy.

[jpod]

Also, some employers in your situation would consider implementing a 3% SH non-elective in conjunction with a 3% hourly wage rate reduction, or foregoing one year's worth of hourly wage increase, depending upon how easily that can be "sold" to the employees and/or it's impact on retention and hiring. 

[ldr]

Hi Mr. Bagwell,

We presented the Safe Harbor match plan to them and really tried our best to sell that idea.  My guess is that they perceive it as potentially being too expensive if enough people participate.  We really don't like the idea of a deferral-only plan even for the NHCE group without the HCEs because only a very few people will use it and as you say, we still have to process all those people for census purposes.  It seems like such a waste of resources.

We are not considering putting in a plan like you described, a non-Safe Harbor covering everybody.  For all the reasons you cited, that will not work.

My guess is that they are talking to multiple TPAs and someone else has suggested what they are now requesting, which appears to be the deferral plan for all but the HCEs and the NQ plan for the HCEs.

Our shop is small and we do not try to do all things for all people.  We don't do ESOPs for example, preferring to defer to the ESOP gurus on that.  We haven't been doing NQ plans but we are wondering if perhaps we should.  Meanwhile we are asking questions and researching the subject.

What I initially was asking was whether there is some new technique for manipulating qualified plans to produce the desired effect.  I don't see how that could possibly work with only using qualified plans.  However after doing more research and reading the responses here, I am inclined to think that the combination of the deferral-only plan for the NHCEs and the NQ plan for the HCEs could get the job done if they are amenable to all the drawbacks of the NQ plan and if we decide we want to jump into this arena.

Thanks!

[XTitan]

I actually didn't think there was a good alternative to SH, but I recognize I don't know what I don't know.  I'm not surprised an ERISA attorney would push back.  There is a lot of nuance to the NQ regs that specialists can understand, but it might be tough to fathom for an ERISA attorney who focuses only on qualified plans.

[ldr]

jpod, thank for the 3% ideas.  I doubt that the employees could afford a 3% pay cut, and I also doubt that the employer was planning a 3% pay raise for next year, but it certainly won't hurt to at least ask!

[C. B. Zeller]

Since the employees are spread out among different corporations, it might be possible, if they meet the other requirements, to disaggregate some of those corporations as a QSLOB. You would still have to include some of the NHCEs in the safe harbor plan, but potentially many fewer.

[david rigby]

49 minutes ago, XTitan said:

I'm not surprised an ERISA attorney would push back. 

I am surprised that an ERISA attorney would push back.  IMHO, you need to talk to (at least one) other ERISA attorney.  I can recommend several such individuals.

BTW, as stated, although a NQ plan (where the ER is putting up the money) is subject to creditors or other risk of loss, this is substantially more valuable than the current zero in those "accounts".

[XTitan]

12 minutes ago, david rigby said:

I am surprised that an ERISA attorney would push back.

I have had many wonderful conversations with ERISA attorneys who have zero NQ experience.  A suggestion to a client to find more experienced ERISA attorneys who are more familiar with NQ is generally met with great appreciation...

[jpod]

Another idea might be to experiment with auto-enrollment in the 401k plan and see how it goes.  I am pretty sure the statistics show that a high percentage of those auto-enrolled do not opt out. 

[ldr]

All interesting ideas!  Thank you all very much.  I will let you know the outcome. david rigby, thanks and we may very well need to get in touch for a recommendation if the other 2 local ERISA attorneys here are not experienced with NQ plans.

[Mike Preston]

2 hours ago, C. B. Zeller said:

Since the employees are spread out among different corporations, it might be possible, if they meet the other requirements, to disaggregate some of those corporations as a QSLOB. You would still have to include some of the NHCEs in the safe harbor plan, but potentially many fewer.

Combine the qslob with a qserp and many fewer becomes many many fewer. In addition, a few targeted nhce managers can help a lot. 

[ldr]

Mike and C.B., thanks for your ideas.  You are getting into pretty esoteric areas (for us) and we would need to do a lot of research on this.  Our general impression is that QSLOBS are supposed to be extremely unrelated businesses, like say, a gas station, a hair salon and a pizzeria under common ownership.  This prospect of ours has multiple corporations but they all do the same thing.  We didn't think that could qualify for QSLOB status.  As for a QSERP - we'd have to look into that.  

[Luke Bailey]

What Life insurance agents sometimes referred to as a “section 162 bonus plan”  has some of the characteristics of nonqualified deferred comp, but  is not unfunded and therefore doesn’t have the creditor risk.  It’s not a panacea, but you might look into it. You should be able to find some information about these by just googling the term “section 162 bonus plan,“ with and perhaps without the name of your favorite life insurance company. The ones active in the market use majestic animals, implying strength and stability, in their advertising. There are no  magic tax benefits for Section 162 bonus plans, but,  depending on the financial goals and  expected turnover of your HCE’s, they might be worth looking into. 

[FPGuy]

Let's start with the basic tax difference between qualified and non-qualified (outside of 457) plans: qualified plan contributions by the employer are deductible; non-qualified contributions are not except to the extent taxable to the participant (hence a "162 bonus"). Here, then, is how such a plan could work using a life insurance Policy (funded to the MEC threshold). A few comments on that term and Policy selection follow the sample outline of design.

For every dollar the HCE contributes to Policy, Employer will provide a {insert percentage} match.     -  HCE contribution is non-deductible (think of it as a Roth contribution);  -  Match is fully deductible but taxable to HCE, so -  Employer grosses up the match (also deductible).  Depending on the tax bracket assumed for the gross up payment, and the extent to which local taxes or the employer's share of SS taxes are taken into consideration, the non-qualified match will cost the employer 30 - 60% more net after tax than a qualified plan match (ex: employer TB = 21%; HCE TB for gross-up purposes = 28%; no local tax or SS adjustment. Cost of $10K QP match NAT = 7,900; gross up for $10K NQ match = $3,889; NAT for NQ contribution + gross-up = $10,972; Difference 38.89%). However, eventually the employer will receive a deduction for NQ payout. Deferred benefit, deferred offsetting deduction.

Vesting - what client wants it to be? If desired, design can include a forfeiture provision for some or all of the match (and earnings thereon?) to be pulled out of the Policy, but think it bad form (and never seen) forfeiture relative to the HCE contribution (and earnings thereon). "162 bonus plan" with forfeiture provisions often referred to as a "Restricted Employee Bonus Arrangement" (REBA).

HCE Benefits - In addition to insurance protection, cash values will grow tax deferred; HCE will be able to recover cumulative premiums (including match) tax free, and may be able to access additional cash value tax free through Policy loans.

Insurance Policy Considerations:  -  The MEC (Modified Endowment Contract) threshold separates the favorable tax treatment of life insurance proceeds and withdrawals from the less favorable tax treatment of annuities. Funding to MEC limits reduces internal Policy expenses and maximizes cash value build-up.  -  Variable Life allows the Policy owner to allocate cash values among a menu of 401(k) type sub-accounts (subject to any Employer mandated restrictions). No ceiling or floor on performance.  -  General Account Universal Life or Whole Life essentially passes on a return based on the performance of the insurer's reserves, which for a better rated company will be primarily investment grade bonds. Modest return expectations, with some performance guarantees.   -  Equity Indexed Life is a hybrid, with investment return based on the performance of a selected index (such as the S&P 500), generally exclusive of dividends. There are downside performance guarantees (such as 0% floor) and upside ceilings.

[Mr Bagwell]

Are Life Insurance Companies comfortable with policy just under the MEC?  I know "MEC'ing out" is really bad.

[FPGuy]

"Mec'ing out" means that any withdrawals from the policy, including loans, come out earnings first.  Issue for the policyowner, not the insurer. As "Mec'ing out" maximizes the premium relative to the death benefit, it gives the insurance company more money to invest with relatively little additional commission exposure, as commissions are heavily weighted toward a "target premium" that is a function of the death benefit. Note that once a MEC, always a MEC (although remediation possible if caught/addressed early). MEC status cannot be cured by 1035 exchange.

[loserson]

On 6/26/2019 at 4:21 PM, ldr said:

We don't really think that the 12 HCEs will appreciate their contributions being a general asset of the employer, being subject to taxation if they leave and take the funds, etc.  We understand that the contributions could be put into a Rabbi trust, but even then, they are still subject to the claims of creditors if the company experiences bankruptcy.  All that makes this look like a doubtful solution.

Are we missing some cutting edge, new plan design possibilities within the world of qualified plans?  How have you addressed such requests, if you can share?

Remember that the HCEs can still max their 401(k) accounts, so they are getting some 401(k) trust protection already.  The idea of a nonqual plan is to get them extra deferral beyond the qualified plan.

I agree that this is poor tax planning on the employer's part.  But the decision to use a rabbi trust as part of the overall comp strategy is a reasonable one.

I think you are being overly conservative about rabbi trusts.  Rabbi trusts are quite common and most executives are fine with it because the alternative is immediate taxation.  The bankruptcy risk over the time horizon of their deferral is usually not significant.  They can keep rolling it over in 5-year increments if they want (as long as they elect to re-defer at least 12 months in advance).  In exchange for deferring tax, and the opportunity to stretch out your distributions to reduce tax bunching, the bankruptcy risk is usually an acceptable trade-off.

There are other ways to deliver exec comp.

• You can do a 401(k) excess plan.  This is just a particular kind of NQDC or SERP, but it's designed to simplify the executive's elections and to cross over the limits and maximums of the 401(k) plan.  That might be what they meant by a "carve out" plan.
• With equity awards, like restricted stock or stock options, the equity gives some deferral until the equity is sold.  But that can bunch up employees' portfolios in one stock, which is bad, and it has lots of administrative and legal complications, and the ownership consequences need to be considered.
• You can do phantom equity and stock units, but all those non-equity awards are just different ways to tally what are ultimately just cash bonuses. 
• You can offer special perks, like travel and housing and transit, or reimburse things like car insurance or home insurance or gym memberships or mobile phone costs.  But many of these benefits will usually be structured to be taxable, so they are really just a fancy way to pay salary but in a way that is less flexible than salary.
• I really think a simple top hat nonqual is easier to explain and easier to administer.  For a small top hat group of 12, I think a simple NQDC works well.

other ideas-

The employer could offer HDHPs and HSAs so that HCEs get another opportunity at tax deferral.  HSAs are held in trust by a bank, so it avoids rabbi trust limitations.  It's not a costly benefit, but it tends to see disproportionate use by more sophisticated and higher-income employees.  If the participants do not spend the HSA money on their medical expenses, then they can reimburse themselves in later years, and the money is a tax-free savings vehicle.  And at age 65, it starts to work like a trad IRA, with no more penalties for voluntary non-medical distributions.  So it's a deferral chance without using a rabbi trust.

If you really want to remain in the qualified plan world, will you be offering the after-tax non-Roth contributions?  The folks who max out their $19k can keep contributing up to the annual additions limit, which is $56k now.  So if there are no employer contributions and no other allocations, an executive can contribute $19k pre-tax and then an additional $37k after-tax.  That's not a Roth contribution, but you can allow in-plan rollovers into Roth, or you can allow them to do in-service distributions of their after-tax amounts.  There is no tax on the rollover, except to the extent of gains, and after that it just becomes Roth.  It gives high-income people an extra bite at deferrals.

After-tax non-Roth is an easy benefit and most plans could offer it with little difficulty.  This is not really a special trick.  But not everybody is aware of it.  You can have the employer present it to executives as an extra chance at deferral - and the funds would be either in the 401(k) trust or their own IRAs, so that avoids the rabbi trust problems.

Maybe if you give the executives several opportunities to get deferral into secure trusts, you can be more comfortable with using a rabbi trust as one portion of the overall executive compensation strategy.

[jpod]

3 hours ago, loserson said:

Remember that the HCEs can still max their 401(k) accounts, so they are getting some 401(k) trust protection already. 

Huh?  That they won't be able to get anywhere NEAR maxing out is the entire point of this discussion!

[loserson]

21 minutes ago, jpod said:

Huh?  That they won't be able to get anywhere NEAR maxing out is the entire point of this discussion!

I think you're talking about annual additions max?  I was talking about annual deferrals max.  A highly compensated employee could very plausibly hit $19k in their own deferrals, and many of them do.

Though if the plan allows after-tax deferrals, then a highly compensated executive could potentially hit the annual additions max of $56k.

My point is that the rabbi trust is not so worrying, especially if HCEs have the chance to make 401(k) deferrals to move part of their retirement saving activity into qualified trusts instead of a rabbi trust.

[jpod]

18 minutes ago, loserson said:

I think you're talking about annual additions max?  I was talking about annual deferrals max.  A highly compensated employee could very plausibly hit $19k in their own deferrals, and many of them do.

Am I on Candid Camera?

[Mr Bagwell]

4 minutes ago, jpod said:

Am I on Candid Camera?

Yes.  :)

[ldr]

Let me clarify this a bit.  They don't plan for the 12 HCEs to be involved in the qualified 401(k) plan at all.  That's because it will have at least 600 employees in it and they don't want to give anything at all to them.  The qualified 401(k) plan will be deferral only, more or less a convenience for the NHCE employees but not a "benefit" in the sense of any employer contributions being made for them.

So for those 12 HCEs, what we are looking at is a "mirror image" plan.  It's not an excess plan on top of normal 401(k) participation; it's a plan to serve the HCEs instead of a normal 401(k) plan, in which the employer can and will make a matching contribution.

We are still studying, calling people, and asking questions.  We are a lot more amenable to the whole idea than we were a week ago.

Thank you all for your comments and observations.  We learn a lot about what to go study further just from your commentary!

 

[FPGuy]

Re corporate creditor risk:

- Leveraged companies that violate loan covenants, even if they are otherwise not in default ("non-performing performing loans") may not be permitted by their creditor(s) to pay out deferred comp;

- As someone famously said, bankruptcies happen slowly then all at once. Who saw Lehman Brother's bankruptcy coming?

However, in my experience, even before 409(A) limited creditor risk strategies, the fly in the ointment re NQDC plans was their symmetrical tax consequences: employer didn't get a deduction until employee had concomitant income recognition.

 

 

 

[loserson]

28 minutes ago, ldr said:

Let me clarify this a bit.  They don't plan for the 12 HCEs to be involved in the qualified 401(k) plan at all.  That's because it will have at least 600 employees in it and they don't want to give anything at all to them.  The qualified 401(k) plan will be deferral only, more or less a convenience for the NHCE employees but not a "benefit" in the sense of any employer contributions being made for them.

So for those 12 HCEs, what we are looking at is a "mirror image" plan.  It's not an excess plan on top of normal 401(k) participation; it's a plan to serve the HCEs instead of a normal 401(k) plan, in which the employer can and will make a matching contribution.

We are still studying, calling people, and asking questions.  We are a lot more amenable to the whole idea than we were a week ago.

Thank you all for your comments and observations.  We learn a lot about what to go study further just from your commentary!

Ahh, this helps explain the issue.  That means it's not really a concern that they will fail testing in the 401(k) plan but it is a concern that they are concentrating risk in the rabbi trust and they are forgoing lots of tax advantages.

I think it makes a lot more sense to suck it up and just do a 401(k).  More employees understand it, the tax consequences are generally better, the administration and vendor selection is easier, and as you pointed out originally the bankruptcy risk is segregated from past plan contributions.

Sticking all the HCEs into a top hat plan means they will not see tax-free accumulation all the way to retirement, unless they keep their NQDC at the company the whole time.  So instead of HCEs getting $19k deferrals limit and $56k annual additions, they have the $6k IRA limit.  For the catch up folks, that's $12k IRA limit, but still nowhere near $25k and $62k limits.

I think you need to have a really generous plan to counteract how much costlier this is to the HCEs to cut them off from the 401(k).  I think that it might be costlier than just making a 401(k) plan that passes testing, but maybe their workforce mix of HCE to rank-and-file is lopsided enough that they can get by with a not-too-generous top hat NQDC and a threadbare 401(k).

If the employer goes through with it, remind their payroll not to report the HCEs as being covered by a retirement plan at work.  That'd be Box 13 on the W-2.  Not checking that box helps the HCEs deduct their IRA contributions.

[ldr]

@loserson:  Thanks for your observations.  They will not do what WE consider to be a "normal" 401(k) plan (in our world that's a Safe Harbor plan).  The employer will not provide a Safe Harbor match or a Safe Harbor Non-Elective contribution.  Period.  They plan to put in a deferral only 401(k) plan for the NHCEs and to do something else entirely for the HCEs.  We are pretty sure that other TPAs are talking to them about NQ plans and have gotten them interested in the idea.

There is no point in enrolling 12 HCE employees into a traditional, non-Safe Harbor 401(k) plan subject to the ADP test because so few NHCE employees are going to participate that the HCE employees would end up having to take all or most of their deferrals back out of the plan, causing a lot of distress.  They will never reach the $19,000 limit you refer to because even if they put it in, they will just have to take most of it right back out when the ADP test fails.  Remember, we are talking about 600 participants in a plan without a match, and most of those 600 employees are really lowly paid.  They have no incentive to participate.  Why would the employer even bother to set up such a plan?  My guess is that he wants to be able to say he offers a 401(k) plan when hiring people.  Okay, that's not a lie - he will be offering a 401(k) plan.  Just a plan without any employer contributions!

The more we read about the NQ plans, the more we like the concept.  It just depends on the company itself and the employees involved.  Do they trust this employer?  Do they believe the company will be in business 5, 10, 20 years from now?  Do they want to stay and find out?  Will they put up with not being able to roll the eventual distribution to an IRA?  Will the employer and the 12 HCEs be willing to endure whatever disadvantages come with a NQ plan?  We don't know.  We have to find out.

One contributor to this thread suggested a match so rich that greed overcomes caution and entices the 12 HCEs to overlook their reticence.  Who knows?  That might be a great idea.

So all this is to say that no, sorry, one 401(k) plan for all is not a solution because the employer has no intention of making contributions for anyone except the HCE group.

[loserson]

NQ plans are great and I am certainly not trying to talk you out of them.

If you tell the HCEs that they will get thousands or tens of thousands of dollars a year, I doubt most of them will be paying attention to the bankruptcy risk.  They will be watching the dollars.

I think the employer may need to pay an especially generous NQDC benefit to compensate for the worse tax consequences and the lack of 401(k).  If the executives can move to competitors that offer 401(k)s in addition to exec comp, then they need to be more generous to keep up.  But maybe this is a low-paying industry (if they can go years with no plan at all and now expect employees will be happy with zero match, then it's probably low-paying) and maybe competitor compensation is equivalently paltry.  In which case, maybe even a modest top hat plan is fine.

 

[BG5150]

Don't forget the k Plan will be subject to an annual; audit and the attendant costs.

[ldr]

Thanks, BG5150.  I actually hadn't thought about that yet but I am sure the primary person working on this case probably has.  :)

[Mike Preston]

Once a decision has been made to further investigate a top hat plan make sure that 100% of the HCE's fit the IRS eligibility. 

[jpod]

I think Mike Preston meant "DOL top hat eligibility," but he'll let us know if I am wrong.

[Mike Preston]

2 hours ago, jpod said:

I think Mike Preston meant "DOL top hat eligibility," but he'll let us know if I am wrong.

You are not wrong.

[ldr]

Well now that you mention this.......we are a little bit uncertain as to who is eligible.  We've been told that it's not as simple as identifying the HCEs and calling it a day.  Some rather vague phrases like "top management" and  "decision makers" have been tossed around but we don't know whether there is a hard and fast definition of which employees belong in those categories.  Is "top management" only the corporate officers and/or the shareholder employees?  "Decision makers" could be a broader group than "top management", possibly.  If anyone can provide a link to the law that governs this, we would be most appreciative.  Or do we let the ERISA attorney who ultimately drafts the plan make that determination?

[XTitan]

Determining the top hat group is not so easy.  ERISA defines as "a select group of management or highly compensated employees", but the reference to "highly compensated employees" doesn't (necessarily) mean anyone making over 414(q).  DoL hasn't provided a lot of guidance, and court cases generally refer to qualitative and quantitative analyses. 

For example, in Bakri v. Venture Mfg. Co., 473 F.3d 677 (6th Cir.2007), the Sixth Circuit listed the qualitative and quantitative factors to consider when determining whether a plan qualified as a top-hat plan under ERISA section 201(2): (1) the percentage of the total workforce invited to join the plan (quantitative), (2) the nature of their employment duties (qualitative), (3) the compensation disparity between top hat plan members and non-members (qualitative), and (4) the actual language of the plan agreement (qualitative).

So, you can't really say that the top 10%-15% in compensation with a title of Director and above will automatically be a top hat group, but that might be a good starting place for the ERISA attorney. 

[ldr]

Thanks, XTitan, I appreciate your comments.  We will see what happens next!

[loserson]

On 7/2/2019 at 5:23 PM, ldr said:

Well now that you mention this.......we are a little bit uncertain as to who is eligible.  We've been told that it's not as simple as identifying the HCEs and calling it a day.  Some rather vague phrases like "top management" and  "decision makers" have been tossed around but we don't know whether there is a hard and fast definition of which employees belong in those categories.  Is "top management" only the corporate officers and/or the shareholder employees?  "Decision makers" could be a broader group than "top management", possibly.  If anyone can provide a link to the law that governs this, we would be most appreciative.  Or do we let the ERISA attorney who ultimately drafts the plan make that determination?

If we are talking about 12 out of 1800 employees in the company/group (0.67%), and they are the top 12 in terms of pay, and all HCEs, and they are all managers, and they are all company officers, then I would not really worry if this is a good top hat group.

If those things are mostly true, like maybe they are not all officers, then it's probably still fine.

It helps if it's a clearly defined group and clearly designed to stay select and small.  If it's tied to job title or the employer has a narrow pay-grade class for top managers and executives, then that helps.  The feds have pay grades like GS-15 and FS1 and so forth, and they have a Senior Executive Service above the regular pay grades.  If this company has a similar (though certainly less formal!) pay grade system, and the NQDC plan is only for the executive pay grade, that really helps show it's a small, select group.

I might feel less sanguine if they exclusively define it as HCEs, with no other requirements for job title or job duties, officer or manager duties, pay grade, etc.

The main concern, both as drafted and as enforced, is to not let the top hat exception apply to too many people in a company or group and thereby let the exception swallow ERISA.  If the group is very small and the employees are highly paid (sotto voce: and sophisticated), then DOL is unlikely to blink.  Though the absence of 401(k) coverage is an unusual twist and I have not thought through how it might alter the DOL view here.