Who Should Participate?


Originally, Nonqualified Deferral Plans (NQDP's) were designed for high-level executives in a particular company, such as:

  • Presidents and chief executive officers
  • Executive and senior vice presidents
  • Vice presidents
  • Members of the board of directors

Over the past few years, companies have become more aggressive in offering NQDP plans to middle management, since:

  • An increased number of executives are being affected by the limitations of qualified plans.
  • Executives are in high demand in competitive industries, and a NQDP plan is an excellent tool for attracting and/or retaining key executives.

The selection of the appropriate group to participate in the plan is critical to qualifying for the top hat exemption , and thereby bypasses the complex restrictions and limitations ERISA imposes. If the exemption is violated, the plan would be subject to a great many of the provisions of ERISA that are applicable to qualified plans, without the benefit of tax-deductible contributions.

A top hat plan is "unfunded" and maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees.

The following provides information with regard to the select group question. Please see Investment Options for more information about what it means for a plan to be unfunded.

In general, to qualify for the top hat exemption under ERISA, an NQDP plan must be restricted to a select group of management or highly compensated employees. The term highly compensated does not necessarily take on the same meaning as it does in the qualified plan regulations. Instead, it is intended to identify a limited number of executives who may qualify for participation in the plan.

According to the Department of Labor (DOL), a separate determination must be made for each employer based on the compensation and management demographics of the employee population. The objective is to limit participation to a relatively small group of highly paid executives. If the eligible group becomes too large, the plan will be required to satisfy the restrictive requirements of ERISA and defeat the objectives of the plan.

The DOL has never issued a clear definition for the terms "management", "select group", or " highly compensated". They have issued opinion letters in the past, but have since stated that these opinions may no longer be relied on for guidance. As stated above, a separate determination must be made for each employer based on the compensation and management demographics of the employer's total work force.

Selecting Participants
Here are some guidelines for selecting the participants:

  • In general, the plan should limit participation to a small group of highly paid executives, relative to the total employee population. In addition, an employee, to be considered management, should have definitive management responsibilities and duties. 
  • Plan participants should be key employees, and should be designated as key employees by the company - usually by the board of directors. 
  • A minimum salary level should be set for participation. This would aid in demonstrating that the plan is for a select group of highly compensated executives. 
  • If there were any doubt as to the viability of the group selected, it would be advisable to establish separate plans for employees who would undoubtedly qualify, and those who may not qualify. This would "protect" at least the major plan, if the other plan is deemed to violate the top hat provision. 
  • An NQDP should also contain what is commonly called an unwind provision, which states that if a plan participant is found not to be a member of the select group for any reason, then the participant's account balance would be distributed immediately.


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