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No Top-Hat Plan When Sales Clerk Permitted to Participate

A nonqualified deferred compensation plan can be an important part of an employer’s overall compensation program. Unlike qualified retirement plans, which limit benefit amounts and require broad coverage, nonqualified plans provide a virtually unlimited opportunity to defer income and may be targeted to key individuals. Additionally, nonqualified plans are generally exempt from ERISA’s fiduciary, funding, and vesting requirements.

To enjoy all of these advantages, however, ERISA requires that a nonqualified plan be maintained primarily for the purpose of providing deferred compensation to a select group of management or highly compensated employees. Because such employees are commonly described as a “top-hat group,” a plan covering only such employees is known as a “top-hat plan.” In Guiragoss v. Khoury, a federal district court in Virginia ruled that a nonqualified plan was not a top-hat plan because a non-highly compensated employee was allowed to participate.

The employer in this case (a jewelry store) had established a nonqualified deferred compensation plan. A sales clerk was offered – and accepted – the opportunity to participate in the plan. After a dispute arose concerning her account balance, the employee sued her employer for breach of fiduciary duty under ERISA. The employer sought to have the suit dismissed, arguing that the plan was a top-hat plan, and thus exempt from ERISA’s fiduciary requirements.

In determining whether the plan was maintained primarily for the purpose of providing deferred compensation to a select group of management or highly compensated employees, the court was required to engage in a fact-specific analysis. ERISA does not define the terms “select group,” “management,” or “highly compensated employee” for this purpose. Despite the employer’s contention that the plan was selective because only four employees participated, the court found no evidence that the plan had been limited to a select group, particularly since the employer had a relatively small workforce.

The court next concluded that the sales clerk was neither management nor highly compensated. Even though she had “keyholder” responsibility for opening and closing the store, this was not enough. The court held that there must be some well-established basis for designating eligible plan members as “high level” employees. Aside from her status as a keyholder, there was no evidence that this employee had any other supervisory or managerial duties. On the issue of compensation, the court noted that the sales clerk’s salary was roughly in the middle of the employer’s pay scale, and was thus not high enough to make her a highly compensated employee.

Finally, the court considered a third factor – whether an employee participating in a purported top-hat plan has sufficient influence over the employer to negotiate a compensation agreement that will protect his or her interests when ERISA’s protections do not apply. According to the court, the assumption underlying ERISA’s top-hat plan exemption is that certain top-level executives have less need for ERISA’s protections because they are in a position to negotiate the terms of their own agreements. This jewelry store sales clerk, on the other hand, did not possess the bargaining clout needed to craft an agreement that would protect her own interests. According to the court, “[a sales clerk] is precisely the type of employee that ERISA’s substantive provisions are intended to protect and [the employer] cannot be permitted to use top-hat designation to shield itself from liability.”

Employers should be careful to avoid making their nonqualified plans too broadly available. Doing so could cause the plan – and potential fiduciaries – to be subject to onerous ERISA requirements.