Employer Contributions to Top Hat Group Members

Q. You have a client that is struggling with their top-hat group. It is concerned are that if it uses general titles like Executive Director, Assistant Executive Director and CFO, it may need to offer the plan to a potential non – performer. Could the client in its discretionary allocations of employer contributions simply allocate 0% to the non-performer? Or can it exclude the non-performing Executive Director from the plan altogether?
 
A. The IRS limits the participation to a “select group of management or highly compensated employees.” Even when the employer files their “top-hat” statement with the DOL, they do not name the employees that are covered, merely the number of employees covered under the plan. There are criteria the IRS looks at to make sure that the plan is only covering the “top paid group,” but there is no formal legal definition. Typically, these plans cover the employees by title, which regarding employer contributions could be geared to approval of the board pursuant to their employment contract (as an example), which the board could set at $0 in any given year. Concerning employee contributions, however, things would be different. If their title does change, they may not receive any employer contribution; in that case, they would no longer be eligible to defer into the plan.