Top hat plans are unfunded plans maintained by an employer primarily to provide deferred compensation for management or highly compensated employees. These plans are not tax qualified, and the employer selects the employees covered as well as the benefit amount provided. The deferred compensation is not set aside in a trust, and it is subject to the claims of creditors as it remains in the company's coffers. It is not considered to be a retirement plan, but often is used that way.
Mr. Taylor worked at NCR. He retired to receive a survivor (top hat plan) annuity yearly benefit of about $29,000 for his life and his wife's life. Without warning to Mr. Taylor, NCR terminated the plan and paid Mr. Taylor a lump sum benefit attendant with a huge tax bite (The $440,976 was reduced to $254,063.
The IRS did not send a thank you note!). The lump sum benefit ($440,966) had also been reduced to present value at discount rates selected by the plan (Present value is a discount applied to the receipt of money that normally would have been paid in the future over time.). The problem is that the discount rate applied was solely selected by NCR. Mr. Taylor had no say, even though it was his deferred money.
Mr. Taylor sued for benefits, statutory penalties, and attorney's fees for NCR failing to give him the changes to the plan. The court dismissed all claims after a motion to dismiss was filed. Taylor v. NCR Corp., 2015 WL 5603040 (N.D. Ga. 2015). This case underscores that it is necessary for top hat plan participants to be very vigilant as noted above. There are significant risks. If you see any cause for alarm, you should get counsel from both legal and tax professionals. See www.erisacase.com for more information. Our team of attorneys provide ERISA law services throughout Alabama, Mississippi, and the surrounding states.