Top Hat Retirement Plans (THRPs) are non-qualified deferred compensation plans designed to enable key executives to defer a portion of their income into a tax-deferred account, similar to the 401(k). They don’t, however, typically have contribution and investment limits similar to 401(k), making these plans ideal for providing incentives to stay with one company longer and retain talent. A top Hat Retirement Plan may also serve as an effective tool in recruiting or retaining talent at companies.
Federal law mandates reporting and filing requirements for qualified retirement plans, but does not impose similar reporting or filing obligations on non-qualified deferred compensation plans (NDC plans). To meet the definition of an NDC top hat plan, its plan must be unfunded, consist of select management or highly compensated employees covered by multiple plans, file with the Department of Labor a registration statement for registration with them as top-hat plans, provide copies of plan documents when asked for by DOL, file registration statement with them as top hat plans must also provide copies upon request from DOL to DOL as part of top hat plans.
Top hat retirement plans offer flexible benefits payment methods, usually through either lump sums or annual installments. Benefits typically become payable upon retirement, separation from service, disability, death or an unforeseen emergency; in other cases they may be payable over five or 10 years as they don’t fall under ERISA requirements and hence may have more flexible vesting schedules and forfeiture provisions than their ERISA counterparts.
Top Hat plans may feature employer contributions as an addition or even in place of employee salary deferrals, with these contributions often subject to vesting requirements and forfeiture clauses requiring executives to work for certain amount of years or until reaching a specified age in order to receive them and any associated earnings.
An important feature of a top hat retirement plan is that it doesn’t need to be fully funded; therefore if an executive is concerned that their planned payments might not materialize when needed, informal funding vehicles such as rabbi trusts and corporate owned life insurance (COLI) could help provide additional liquidity when needed. Furthermore, employee-owned policies accumulate tax-deferred value.
Under top hat plans, executive plan payments may be deducted directly from general assets when due. This can present the real risk that benefits may not be delivered as promised, which is why these plans are typically informal funded. In more serious situations, employers may choose to fund such plans using either a religious or secular trust in order to provide greater assurances that promises payments will indeed be fulfilled – something to carefully consider as part of an overall executive compensation strategy.