A recent 6th Circuit case—Wilson v. Safelite Group, Inc. (July 10, 2019)—illustrates why plan sponsors should take steps to ensure their nonqualified deferred compensation plans comply with ERISA's "top-hat" plan exception. A non-top-hat employee benefit plan must comply with ERISA's funding requirements, nondiscrimination in coverage and benefits, vesting and fiduciary rules. Where a plan satisfies the "top-hat" plan exception, as did the plan at issue in Wilson, the ERISA implications are limited and can serve as an additional layer of protection for the plan sponsor, including by preempting state law claims.
A top-hat plan is a deferred compensation plan that limits participation to a select group of management or highly compensated employees. A top-hat plan is still subject to reporting requirements, but the plan sponsor may satisfy these requirements simply by filing a one-time letter with the Department of Labor. A top-hat plan is also subject to ERISA's claims procedures requirements, which require an internal review and appeals procedure before a participant may take the claim to litigation. Further, discovery generally is limited to the administrative record developed during the review.
In Wilson, Safelite's CEO participated in the company's top-hat nonqualified deferred compensation plan, which permitted eligible executive employees to defer their base annual salary, long-term bonuses, and transaction incentive bonuses. Following Mr. Wilson's termination of employment, his $9.1 million plan account incurred substantial penalties due to deferral election failures under Section 409A of the Internal Revenue Code ("Section 409A") that were identified by the IRS in a 2014 federal audit. Such penalties included immediate income inclusion, a 20% excise tax, and premium interest. Mr. Wilson sued Safelite in federal court, asserting under state law that (1) Safelite's failure to comply with Section 409A constituted a breach of contract, and (2) Safelite negligently misrepresented to him that his deferral elections were appropriate. Safelite moved for summary judgment on Mr. Wilson's state law claims, arguing they were preempted by ERISA.
The district court found the plan to be an "employee pension benefit plan" covered under ERISA, which preempts the state law claims. As the plan was a top-hat plan subject to ERISA, Mr. Wilson's only option was to pursue claims under the plan's ERISA-compliant claims procedures. Mr. Wilson was granted 28 days to file an amended complaint asserting claims under ERISA's civil enforcement provisions, but he failed to do so. Safelite was granted relief by summary judgment (as affirmed by the 6th Circuit).
In light of the decision in Wilson, we recommend sponsors of non-qualified deferred compensation plans confirm their plans constitute ERISA top-hat plans. Specifically, plan sponsors should confirm each applicable plan (1) contains language limiting participation to a select group of management or highly compensated employees, (2) has the appropriate ERISA claims procedures, (3) includes provisions disclaiming responsibility for Section 409A violations, and (4) has been included in a top-hat letter filed with the Department of Labor.
Specifically, plan sponsors should confirm each applicable plan