The 3rd U.S. Circuit Court of Appeals has ruled in support of the district court and defendants in a case testing the differences in anti-cutback vesting regulations applying to “top-hat” retirement plans versus traditional defined contribution (DC) or defined benefit (DB) plans.

As detailed in the initial lawsuit, the plaintiff is a former employee of a Pennsylvania non-profit, University of Pittsburgh Medical Center, known as UPMC. The plaintiff, a vice president at UPMC, was a participant in the non-profit’s supplemental benefits plan from 2008 until he voluntarily terminated his employment with UPMC in 2011. The lawsuit claims he applied for a lump-sum distribution of his account balance and says he never received a written decision from the plan committee.

He “kept pursuing the distribution throughout 2012, and eventually received a letter from the committee informing him that all rights and benefits allegedly due to him had been forfeited because he had not entered into a written post-retirement service agreement.” The plan committee maintained that the plan is a “top hat” plan for purposes of the Employee Retirement Income Security Act (ERISA) and was, therefore, exempt from the vesting and non-forfeiture provisions of that law.

In short, the district court ruled the plaintiff cannot rely on ERISA for benefit protections, as the plan in which he participated is indeed a “top hat” plan. Noting that a non-qualified deferred compensation plan under Section 457(f) of the Internal Revenue Code must be maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees, U.S. District Judge Mark R. Hornak of the U.S. District Court for the Western District of Pennsylvania looked to a separate 3rd Circuit case which said “the plan must cover relatively few employees . . . [and] the plan must cover only high level employees.”

Clearly swaying the district court’s decision, the non-profit UPMC provided evidence that from 2007 through 2011 the number of plan participants ranged from 16 to 68. During that time, the total number of UPMC employees ranged from 37,965 to 48,731, so the absolute highest percentage of employees participating in the plan was .14%. Hornak concluded this was “relatively few.” According to the text of the district court opinion, UPMC’s Non-Qualified Supplemental Benefit Plan limits participation to “key executives selected by the committee,” and the primary factors in selecting those key executives are their influence within the organization and their ability to impact its performance. 

UPMC also successfully argued that the compensation of these employees makes certain their “high level status.” Eligibility to participate in the plan is limited to those whose incentive levels under the separate management incentive plan are at least 20% of their salary. During the relevant period, the average compensation of plan participants was roughly $500,000 per year. Hornak concluded these employees were “very handsomely compensated by any measure.”

Important to the subsequent appellate decision, the district court also rejected the plaintiff’s argument that the “bargaining power” of participants is an indicator in favor of a plan being considered a “top hat” plan. Hornak noted there has not been one federal court that has applied “bargaining power” as an element in directly determining whether a deferred compensation plan is a top hat plan that is exempt from ERISA coverage.

Lessons from the 3rd Circuit

Turning to the appeal, the plaintiff-appellee again argued that the district court should have required UPMC “to prove that plan participants had bargaining power before concluding that he participated in a top-hat plan.” But the 3rd Circuit is equally skeptical, ruling simply that “plan participant bargaining power … is not a substantive element of a top-hat plan. We will therefore affirm the district court’s judgment.”

Some additional context is given in the mere 14-page appellate decision: “While Sikora’s notice of appeal also references the district court’s entry of summary judgment on his contract claim, he makes no argument in support of that claim in his briefing. We therefore deem it abandoned.”

As laid out in the decision, the 3rd Circuit has previously described top-hat plans derived from the statutory definition as having three elements: The plan must be unfunded; it must “exhibit the required purpose”; and “it must also cover a ‘select group’ of employees.” Against this backdrop, the plaintiff-appellee has the burden of showing that the plan is not a top-hat plan to obtain relief under ERISA.

The decision goes on: “The plaintiff does not dispute that the plan is both unfunded and maintained by UPMC for the statutorily prescribed purpose. He takes issue only with the third element of the test laid out, which requires that the plan cover a select group of employees … This court has previously described this ‘select group’ element as having both quantitative and qualitative restrictions. In number, the plan must cover relatively few employees. In character, the plan must cover only high level employees.”

According to the decision, applying both the quantitative and qualitative restrictions of the select group element reveals that the plan qualifies as a top-hat plan. During the plaintiff-appellee’s participation in the plan, approximately 0.1% of the entire UPMC workforce was similarly situated. The court cites previous cases where plans serving 15% of an employee population were sufficiently select. As to the qualitative restriction, although the relevant statutory language only requires participants to be members of a select group of management or highly compensated employees, here the plan covers high-level employees who are both a select group of management and highly compensated employees.

The court’s conclusion follows suit: “Given that both the quantitative and qualitative restrictions of the select group element have been satisfied, we hold that the plan in question qualifies as a top-hat plan. Although both the quantitative and qualitative restrictions of the select group element have been satisfied, the plaintiff nonetheless argues that the plan does not cover a select group because there is no evidence regarding the bargaining power of the plan participants. This argument would require a district court to inquire not only into the qualitative and quantitative restrictions discussed above, but also into the presence of bargaining power before concluding that a particular plan is a top-hat plan. The argument is unpersuasive.”