What is a Top Hat plan?  It is an ERISA plan which is maintained by an employer but is unfunded. Its primary purpose is to provide deferred compensation for management and highly compensated employees. 29 U.S.C.S. § 1051(2).  Such an arrangement is fairly common with large companies trying to draw top talent. It allows the employees to defer some of their compensation to a future point in time when not working or income is much less.  That likely lowers the tax rate applicable and allows funds to be set aside for retirement.

For example, it may be advantageous to defer $100,000 of income to a future point in time if a large portion of it would go to taxes anyway due to high compensation.  Of course, since it is unfunded there is the danger of the company defaulting on its obligation if things don't go well for the company in the future. That is unlike pensions which must be funded.

In a recent case, Hoak v. Ledford, No. 24-12148, 2025 LX 328784 (11th Cir. Aug. 26, 2025), NCR Corporation had several top hat plans. In 2013 it terminated the plans and paid a lump-sum to all participants. It claimed this was the actuarial equivalent of what it would pay over time based on mortality tables and actuarial calculations less a 5% discount rate. 

NCR was actually trying to save money as it knew with its calculations that about 50% of the participants would outlive the lump-sum if they continued to withdraw the same monthly benefits they were receiving under the annuities. In other words, NCR used its calculations to shrink its cost of the top hat plans by reducing what is paid each participant. The 5% discount was also unfair as it was based on NCR's own risk of defaulting on its obligation.

Several participants were very concerned over this "shrinkage" and contended that NCR violated the plan document by adversely affecting the benefit due to be paid. NCR disagreed and so suit was filed but as a class action given there were 197 participants impacted by the lump sum strategy.

The district court agreed with the class plaintiffs and ruled in their favor. The court decided that the remedy would be for NCR to pay the difference to participants between the lump sums received and the cost of replacement annuities using the PBGC assumptions in effect on that termination date. NCR however appealed the decision, contending that it had discretion to interpret the plan.

The 11^th Circuit however pointed out that when the plan document is unambiguous, the plan terms will be enforced as written since there is no room for the exercise of discretion when clarity exists. Further NCR argued that it had discretion to pay the actuarily equivalent lump-sum with or without a discount rate after it terminated the annuities. However, the plan did not expressly permit that, and termination was permitted only if there was no adverse effect on accrued benefits. The 11^th Circuit also felt that the remedy invoked by the district court was equitable and appropriate. It affirmed the district court's decision.