| In the benefits and compensation field | | | | Corporate executives frequently have broad |
| "non-qualified" is generally used to describe | | | | discretion in inviting top hat plan participation. Highly |
| arrangements which do not receive special tax | | | | paid employees who are considered to be at risk |
| favored treatment, while "qualified arrangements" | | | | of competitor poaching, for example, can be |
| do. For example a qualified 401(k) plan produces a | | | | offered special benefits. |
| current year tax deferral for contributions and a | | | | The down side to the employee is that money in |
| tax deduction for the employer's portion. Many | | | | a Top Hat plan remains the property of the |
| highly paid corporate executives and other key | | | | employer, according to IRS rules. Top hat funds |
| personnel voluntarily choose to defer the | | | | can be jeopardized in a bankruptcy, since the |
| payment of compensation or benefits earned in | | | | funds technically remain the property of the |
| the current year to a future year, primarily to | | | | employer and are thus exposed to creditor claims. |
| postpone associated tax obligations. | | | | Excess Benefit Plans |
| These deferred compensation plans are governed | | | | "Excess benefit" plans are often more broadly |
| by Section 409A of the Internal Revenue Code, | | | | based. There is an annual limit as to how much of |
| and differ from elective deferrals under "qualified" | | | | an individual's compensation can be counted for |
| plans, such as a 401(k) plan, a 403(b) or a 457(b) | | | | benefits in a qualified plan environment; the |
| plan. | | | | maximum for 2010 is $235,000. |
| Stock options, severance pay, bonus payments, | | | | Benefits in excess of the plan limit can be made |
| restricted stock, partnership payments, and other | | | | "pensionable." If an executive is making a salary of |
| post-employment benefits are among the many | | | | $500,000, for example, the excess amount of |
| forms of compensation subject to Section 409A. | | | | $265,000 ($500K-$235K) becomes pensionable |
| Severance payments resulting from an | | | | through the nonqualified excess benefit plan. |
| involuntary termination, however, are generally | | | | These plans commonly mirror the benefit formula |
| exempt. | | | | of the underlying qualified plan, with some or all of |
| Flexibility is a key feature of non-qualified plans. | | | | the participant's compensation in excess of the |
| Future payments can be tied to | | | | qualified plan limit made pensionable. |
| participant-defined dates, specified trigger events, | | | | The employer is not required by ERISA to set |
| changes in corporate control, and unforeseeable | | | | funds aside in a trust to meet future excess |
| emergencies. | | | | benefit obligations, and there is no vesting |
| The employer's ability to modify the form of | | | | schedule. Looked at another way, this is |
| payment is strictly regulated, as is the funding of | | | | essentially an unfunded obligation. The employer |
| deferred compensation, the timing of deferral | | | | simply promises to pay benefits at an agreed |
| elections, and many other actions. In a down | | | | upon future date. If the employer enters |
| sizing, recessionary and merger environment, | | | | bankruptcy prior to the future payment date, |
| there is an increasing amount of litigation over | | | | courts may rule that creditor claims supersede |
| non-qualified plans often regarding triggering | | | | payments that had been due highly paid |
| events, "for cause" terminations, or non-compete | | | | employees. |
| provisions. | | | | In Summary |
| ERISA and "Top Hat" Executive Compensation | | | | In a qualified benefits plan, funds are set aside in a |
| Plans | | | | trust to meet future obligations. These obligated |
| Top hat compensation plans allow for selected | | | | funds are exclusively dedicated for providing |
| highly paid employees to receive special benefits. | | | | employee benefits and are protected from |
| While the qualifying level of compensation is not | | | | creditors in the event of a corporate bankruptcy. |
| specified by ERISA, levels are often determined | | | | Qualified benefit plans are also subject to fiduciary, |
| by: a) annual limits, such as those established for | | | | nondiscrimination, coverage, funding, distribution, |
| 401(k) discrimination testing; or b) a class of | | | | reporting and disclosure rules, while non-qualified |
| employees, such as directors and officers. | | | | plans are not. |