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PSCA Executive Reports

February 27, 2018

Third Circuit Holds Plan Participant Bargaining Power is Not a Substantive Element of a Top Hat Plan

The Third Circuit recently departed from the Second, Sixth and Ninth Circuits, and aligned itself with the First Circuit, holding that bargaining power is not a substantive element of a top-hat plan. 

A top-hat plan is viewed by most courts as having three elements: (1) the plan must be unfunded; (2) its principal purpose must be to provide deferred compensation benefits; and (3) it must cover a “select group” of employees. The plaintiff, Paul Sikora, did not dispute that his employer’s plan (“the Plan”) was both unfunded and maintained by his employer primarily for the purpose of providing deferred compensation benefits. Rather, Sikora took issue only with the third element of top-hat test, arguing that the plan did not meet the “select group” requirement. Although both the quantitative and qualitative restrictions of the “select group” requirement were met, Sikora argued that the Plan did not cover a “select group” because his employer was not required to show any evidence regarding the “bargaining power” of Plan participants. To make this argument, Sikora relied on a paragraph from a 1990 Department of Labor opinion letter in which the agency stated that Congress “recognized” that certain individuals, by virtue of their position or compensation level, have the ability to negotiate or influence the design and operation of their deferred compensation plan, and therefore wouldn’t need the rights and substantive protections of ERISA. DOL Advisory Opinion 90-14A (May 8, 1990). 

The Third Circuit noted that the Second, Sixth and Ninth Circuits had inquired into participants’ bargaining power before determining whether a particular plan qualifies as a top-hat plan. However, the court also noted that the First Circuit had declined in 2008 “to depart from the plain language of the statute and jerry-build onto it a requirement of individual bargaining power.” See Alexander v. Brigham & Women’s Physicians Org., Inc., 513 F. 3d 37, 47 (1st Cir. 2008). Siding with the First Circuit, the three-judge panel ruled against Sikora, determining that the Department of Labor opinion letter did not require that participants in a top-hat plan possess bargaining power. 

You can read the Court’s opinion here.


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