A recent U.S. District Court case, Callan v. Merrill Lynch & Co., Inc., (S.D. Cal., Aug. 27, 2010), provides additional guidance on the requirements for a plan to be classified as a top hat plan under ERISA.
Top hat plans must be only for a "select group of management or highly compensated employees" and are exempt from ERISA's vesting, funding, and fiduciary responsibility requirements that are typically imposed upon ERISA plans. One of the more frequently cited rationales behind this exemption is that the participants in top hat plans are able to affect or substantially influence the design of their top hat plan by virtue of their position or compensation level.
Callan affirmed the status of the Merrill Lynch WealthBuilder Plan as a top hat plan and thereby thwarted a legal action brought by several former financial advisers seeking to impose ERISA's minimum vesting standards to their benefit under this plan. In so doing it provided some contours on the four-part test used by other courts, in particular Bakri v. Venture Mfg. Co., 473 F.3d 677 (6th Cir. 2007), in determining a plan's top hat status. Bakri looked to the following four factors in assessing top hat plan status: (1) the percentage of the total workforce invited to join the plan; (2) the nature of their employment duties; (3) the compensation disparity between top hat plan members and non-members; and (4) the actual language of the plan.
Using the Bakri criteria, Callan observed that: (1) "plans that limit participation to 15% or less of the workforce have consistently been treated as top hat plans," and the WealthBuilder Plan satisfied this requirement; (2) while the plaintiffs had no ability to influence the design of the WealthBuilder Plan, none of the parties disputed that the plan was primarily for highly compensated employees; (3) the average compensation of the participants in the WealthBuilder Plan was more than double that of all Merrill Lynch employees and "courts have found that a 2:1 disparity is sufficient to satisfy this prong of the test"; and (4) the plan stated that it was intended to be unfunded and maintained primarily for the purpose of providing deferred compensation for the members of a select group of management or highly compensated employees (although Callan considered this language self-serving and did not rely on it in making its determination).
While not necessarily ground-breaking, Callan does provide useful guidance for future top hat plan sponsors by (1) giving bright-line treatment to plans that invite 15% or less of their workforce to participate as satisfying the percentage of total workforce factor, and (2) granting top hat status to the plan even though the nature of the employment duties of the participants were such that they could not have influenced the plan design (i.e., it being sufficient that the participants were highly compensated employees).