Interest in Adopting a 457(b) Top Hat Plan

Q. Where will you find interest in adopting a 457(b) top hat plan? 

A. Any tax-exempt employer will have an interest in a plan which is designed only to reward key employees. Some motivating factors could include:

• Chamber of Commerce has a 401(k) plan to which they are making matching contributions of 3% of employees’ deferrals. Their two highly compensated employees are the Executive Director and Associate Executive Director, who routinely receive a return of some of their contributions following nondiscrimination testing. The chamber would like to: 

1. avoid the cost of testing both employer contributions and elective deferrals; and
2. find a way to reward their two most important employees without running afoul of nondiscrimination rules. 

Solution: The chamber adopts a 457(b) top hat plan, and includes both employees in that plan, while excluding them from the 401(k) plan.

Result? Since no highly compensated employees are covered in the 401(k) plan; the plan is automatically non-discriminatory. No testing is needed.

The chamber makes matching contributions to the top hat plan on behalf of the two key employees of 3% of compensation, while the two employees contribute the balance of the limit permissible limit under annual rates the IRS sets. 

• Council on Aging sponsors a 403(b) plan for its 16 employees; however, because of nondiscrimination rules, has been unable to reward their long-term key management employees to the extent the council wishes to do so. The council adopts a top hat plan for the two management employees where contributions of up to the amount annually set by the IRS either through salary reduction contributions or employer contributions, or a combination of the two.