Q. What is a top hat plan?
A. It is a 457(b) plan sponsored by a non-governmental 501(c) employer, which must cover only a select group of key management employees. In fact, contrary to the rules for retirement plans, a top hat plan must discriminate in favor of management employees because “rank and file” employees cannot be included. This is the only way in which the Department of Labor (DOL) would be willing to potentially exempt the plan from ERISA, which is a must!
Since the Internal Revenue Code requires that the employer own the assets in a non-governmental plan, being granted an ERISA exemption is the only way to assure that the employer’s required ownership of the assets doesn’t force an ERISA violation. By limiting the covered employees to a select group of management, the DOL takes the position that an ERISA exemption can be granted since those employees are unlikely to need the protections of ERISA since they are the decision makers with the authority to design, adopt and implement the 457(b) plan.
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