So-called “Top Hat” plans are nonqualified deferred compensation plans for a select group of management or highly compensated employees. These executive compensation arrangements are exempt from many ERISA provisions, but are not exempt from ERISA’s claims procedure requirements. Therefore, top hat plans must provide a reasonable claims procedure.
ERISA compliant claims procedures can be written to provide discretion to the plan administrator to decide claims. If so written, then courts reviewing the decision typically give the plan administrator deference with respect to the decision made. Courts also generally require that the claimant exhaust the claims procedure before bringing a law suit. In a recent federal district court decision, the court applied these same principles to a top hat plan.
The top hat plan in question contained a claims procedure and explicitly provided that participants had to exhaust it before bringing suit. The participants in the case did not exhaust the claims procedure but went directly to court. The court said that the participants could not proceed with their claim because they had not exhausted the claims procedure and sent the matter back to the plan administrator for decision.
Employers establishing top hat plans may wish to include in their claims procedures an explicit requirement that the claims procedure must be exhausted before a claimant can bring a law suit. The employer must then also follow that claims procedure carefully in deciding claims. By doing so, the employer is more likely to have its decision upheld in the event of a court challenge.