The US Department of Labor (DOL) has proposed to require so-called "top hat plan notices" to be filed electronically instead of on paper. In so doing, the DOL would move the mechanics of this often-overlooked task into the 21st century. Unfortunately, the proposal does not address certain ambiguities involving the notice that have persisted for the last 40 years.
Nonqualified plans that are unfunded, that cover a select group of management or highly compensated employees and that defer income to the termination of covered employment or beyond ("top hat plans") are exempt from the participation, benefit accrual, vesting and fiduciary rules under the Employee Retirement Income Security Act (ERISA). For a top hat plan to be exempt from most of ERISA's reporting and disclosure rules, however, the plan administrator must file a simple one-time paper statement ("top hat plan notice") with the DOL and provide plan documents to the DOL in the unlikely event the DOL requests them. Under a newly proposed regulation, the top hat plan notice must now be filed electronically.
Under current regulations, a paper copy of the top hat plan notice must be mailed or personally delivered to the DOL by the plan administrator. The notice is required to include information identifying the employer, the number of top hat plans maintained by the employer and the number of employees in each plan (but no other substantive information, including the name of the plan, needs to be provided). Filing this notice exempts the top hat plan from most reporting and disclosure requirements, such as providing a summary plan description and filing Form 5500. Top hat plans must in any event have a claims procedure and are subject to ERISA's enforcement provisions.
On September 16, 2014, the DOL proposed to amend its regulations to require that top hat plan notices be filed electronically.1 The regulation is effective immediately on a voluntary basis, and becomes mandatorily effective 120 days after publication of the final rule in the Federal Register. The DOL's Employee Benefits Security Administration (EBSA) has launched a web-based filing system for the notices, which provides an instantaneous electronic confirmation that the filing has been received by EBSA. In addition, the electronic notices will be posted on the DOL's website and be available to the public. Further, the web-based electronic form contains blanks to be filled in, so that all the required information is certain to be provided.
Electronic filing of the top hat plan notice should be a welcome update. It is quite common for an employer not to be able to locate a top hat plan notice that was filed on paper, and copies of filed notices are difficult to obtain otherwise. For example, they are not available on any DOL website. Although the filing of a top hat plan notice is not a prerequisite for top hat plan status,2 the question of whether a top hat plan notice was filed is sometimes raised in litigation, either as evidence of whether the employer intended to maintain a top hat plan, or (erroneously) as evidence that the plan is not eligible for exemption from ERISA's substantive requirements. Also, the question of whether or not a top hat plan notice was filed, either for the target company's top hat plans or for plans the target company has acquired over the years, is often a nettlesome issue in merger and acquisition due diligence. Thus, it is beneficial for employers with top hat plans to be able to prove they filed a top hat plan notice. For this reason, some employers have filed under the DOL's Delinquent Filer Voluntary Compliance (DFVC) Program. Under that program, upon payment of a modest fee and partial completion of page one of Form 5500, a plan administrator is deemed to have filed the top hat notice statement late, but going forward is deemed to have complied with the top hat plan notice requirement both retroactively and prospectively. The new proposed electronic filing requirement will obviate the need to keep track of paper notices, although it does not replace the DFVC Program for late filings.3
The preamble to the proposed regulation states that the DOL does not intend to comment on or change the current content requirements for the notice. However, the form of electronic notice on the new website does not entirely match the current content requirements. The electronic top hat plan notice:
- Requires the name and address (including the email address) of the plan administrator, which is not specified in the current regulation
- Permits, but does not require, plan names to be stated
- Does not require an undertaking to provide plan documents on request; the current regulation also does not require such an undertaking, but many, if not most, employers have provided it
- Requires a box to be checked if it is an amended notice; the current regulation does not require amended or updated top hat plan notices
Top hat plan notices may cover more than one plan, and the existing regulation provides that "[o]nly one statement need be filed for each employer maintaining one or more [top hat] plans." The DOL acknowledges this provision in the Paperwork Reduction Act disclosure portion of the proposed regulations, but not in the preamble or the proposed regulation itself.
There has always been some uncertainty about how the "one-per-employer" rule applies when an employer adopts (or acquires) a new top hat plan after an initial filing. As noted, the new electronic form has a box for checking whether it is an "amended" form. This box raises the question of when an "amended" form would be required, since the existing regulations do not provide for amending the filing. On one hand, it may provide some comfort for an employer to update (amend) a top hat plan notice periodically to be sure it covers all the employer's top hat plans. However, the existence of a box for "amended" filings also raises the question of whether it is necessary to amend the one-per-employer filing to add new plans or to change a plan name, or whether it is necessary periodically to "amend" a top hat plan filing to update the number of participants, and if so, how often. The number of participants in many cases changes each year or even more frequently.
The ambiguity introduced by the requirement to check a box to indicate an amended top hat plan notice may be addressed in comments, and the web-based form may be modified in the final regulation. If an "amended" notice is required, the DOL may be pressured to provide guidance as to the circumstances that would give rise to an amended notice. However, as the goal of the proposed electronic filing requirement is not to comment upon or change the substantive filing requirements, the desired guidance may not be forthcoming.
The proposed regulation is very simple and its promulgation signals an opportunity for employers to review their existing top hat plans, to locate all existing top hat plan notices and to make a permanent record of them. If any are missing, the DFVC Program can be used relatively inexpensively to bring the record up to date, without necessarily admitting that any forms were filed late. Going forward, the need to keep paper records will be obviated, and all parties should welcome the transparency and immediacy of electronic filings.
- The proposed regulation also requires electronic filing of a similar notice (which since 1980 has been required to be mailed or delivered personally) for welfare benefit plans that provide only apprenticeship or training benefits or both. According to the proposed regulation, the DOL annually receives approximately 120 apprenticeship and training plan notices and approximately 2,000 top hat plan notices. The proposed regulation would revise 29 CFR Sections 2520.104-22 and 2520.104-23.
- If no top hat plan notice is filed, it does not mean the plan is subject to ERISA's substantive requirements, it merely means the plan has not used the “alternative method of compliance” and is thus technically subject to the reporting and disclosure rules.
- To be timely, the top hat plan notice must be filed within 120 days after the plan becomes subject to Part 1 of Title I of ERISA.