Executive Pension Plans: Bargaining Power Not Top Hat Plan Element

Executive Pension Plans: Bargaining Power Not Top Hat Plan Element
December 2017

The 3rd Circuit in Skiora v. UPMC et al, revisited the substantive requirements of a “top hat” plan in deciding whether Plaintiff, Paul Skiora, was entitled to recover pension benefits from his former employer’s supplemental benefit plan.

Skiora, was a Vice President of the University of Pittsburgh Medical Center (“UPMC”) from 2005-2011.  Upon his voluntary termination of employment, Skiora applied for benefits under UPMC’s Non-Qualified Supplemental Benefit Plan (the “Plan”).  UPMC argued that the Plan was a “top-hat” plan exempt from many of the substantive provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”).  Because three of Sikora’s claims relied on ERISA provisions inapplicable to top-hat plans, UPMC argued that his claims should be dismissed.  The District Court concluded that the Plan was a top-hat plan and granted summary judgment to UPMC.  Skiora appealed to the 3rd Circuit.

This case is noteworthy for its thorough discussion of the definition of top hat plans, including a review of the regulatory and case law involving this issue.

ERISA defines top-hat plans as those that are “unfunded and maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees.”  29 U.S.C. §§1101(a)(1), 1051(2), 1081(a)(3).  Skiora did not dispute that the Plan was unfunded and maintained by UPMC for the purpose of providing deferred compensation.  Rather, Skiora claimed that the Plan did not meet the requirements of a top-hat plan (and therefore should be subject to ERISA’s substantive provisions) because it was not maintained for a “select group.”  The 3rd Circuit previously described this “select group” element as having “both quantitative and qualitative restrictions.  In number, the plan must cover relatively few employees.  In character, the plan must cover only high-level employees.  Since only .1% of UPMC’s entire workforce participated in the Plan during the relevant time period, the Court found that the Plan met the quantitative restriction of “select group.”

As to the qualitative restriction, the statute requires participants to be members of a select group of management or highly compensated employees. The Court found that the Plan covered high-level employees who were both a select group of management and highly compensated employees (most Plan participants earned at least 4 times the average annual salary of all UPMC employees).

Skiora argued that, notwithstanding the fact that the quantitative and qualitative restrictions of the “select group” element were satisfied, the Plan doesn’t cover a “select group” because there is no evidence regarding the “bargaining power” of the Plan participants. Skiora was effectively arguing for a third component to the “select group” element.  Skiora relied on a 1990 Department of Labor (“DOL”) opinion letter to support this argument. The 3rd Circuit in Skiora disagreed.  Rather, the Court found that the DOL opinion letter does not require that participants in a top-hat plan possess bargaining power to design or negotiate their deferred compensation plan.  The Court stated that the opinion letter explains Congress’s intent for creating top-hat plans:  a select group of high level employees do not need all of the protections ERISA affords because they presumably possess bargaining power by virtue of their position or compensation level.  Therefore, the Court held, in Skiora, that plan participants’ bargaining power is not a substantive element of a top-hat plan and affirmed the judgment of the District Court.

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