Common use of Applicable Top Hat Case Law Clause in Contracts

Applicable Top Hat Case Law. In Xxxxxx x. Xxxxx, the Ninth Circuit, which includes California, endorsed the functional test (as explained in the 1990 Opinion) to ascertain whether an employee is a member of a Select Group.10 Xxxxxx had negotiated a severance agreement which was to provide monthly payments for life. The employer made payments until it became financially unstable and discontinued payments approximately 9 years later. Xxxxxx sued. The district court held that the arrangement was a top hat plan, and that the owner was not personally liable to Xxxxxx as a fiduciary of the plan. Xxxxxx appealed. The Ninth Circuit considered whether the arrangement constituted a top hat plan. In determining whether Xxxxxx was a member of a Select Group,11 the Ninth Circuit considered several factors. First, it compared the percentage of employees covered by the top hat plan to other cases. As the only employee of 23 covered by the arrangement, less than 5% of the employer’s work force participated in the top hat plan. Based solely on the numerical test, as applied in other jurisdictions, Xxxxxx would be a member of a Select Group. The Ninth Circuit continued, however, noting that in order to satisfy the Select Group requirement, further analysis was necessary and it directly cited the functional test stated in the 1990 Opinion.12 Because Xxxxxx exerted influence over the negotiation, design and operation of the arrangement (either directly or through his attorney), Xxxxxx qualified as a member of a Select Group and the arrangement was a top hat plan. The most recent case addressing top hat plan status in detail is Xxxxxx x. Extebank, a Second Circuit decision.13 Extebank sponsored a nonqualified plan, which permitted its executives to defer compensation. Upon reaching normal retirement age, Extebank’s plan paid a benefit equal to compensation deferred plus interest at the rate of 20%, compounded annually. If a participant left before reaching retirement age, however, the plan paid interest at 10%. Extebank subsequently merged with another bank and the executives terminated employment. The executives brought an action for benefits under ERISA. The district court granted summary judgment for Extebank, holding that the plan in question was a top hat plan, and thus exempt from certain provisions of ERISA (see Footnote 1). The Executives appealed, arguing that it was not a top hat plan because: (i) too many of Extebank’s employees were eligible to participate, (ii) non-highly compensated employees (earning approximately $30,000 per year) were eligible to participate, and (iii) the plan was funded. The Second Circuit held that the plan, which was available to approximately 15% of its management and highly compensated employees, was a top hat plan. Their decision was based on the fact that all plan participants were (i) selected officers of the bank, (ii) in management positions, and (iii) highly compensated (when compared to Extebank’s total work force). Although the Second Circuit acknowledged the importance of a participant’s ability to negotiate the terms of the plan in determining whether a participant is a member of a Select Group, the record was silent on this point and little evidence of negotiating power was shown. The Second Circuit also found that the term “primarily” suggested that a plan intended for a Select Group would not lose its top hat status if a small number of the participants were not part of a Select Group.