Steve Rosenberg in his article today on his Boston ERISA and Insurance Litigation Blog, Top Hat Plans and ERISA, brings into focus one of the inherent problems with Top Hat plans. At least from the standpoint of the employee. That is, Top Hat plans are exempt from the participation, funding, vesting and fiduciary responsibility rules of ERISA.

What’s a Top Hat plan for those of you not familiar with “pension speak?” It’s the descriptive label that is used for retirement plans for a select group of management or highly compensated employees. Top Hat plans are designed to make up for benefits that would otherwise be limited by law. For 2007 that would be a retirement benefit of $180,000 per year in a defined benefit plan and up to $49,000 in a defined contribution plan.

Cases like Steve writes about arise because the Department of Labor has never issued regulations on exactly what is a "select group" that defines these plans. When a participant does not receive what he or she expected from the plan, the participant sues the employer claiming that the plan is not a Top Hat plan because participation was not limited to a “select” group. Thus, says the participant, the plan was required to comply with all the requirements of ERISA.

This "select group" issue is not the only inherent problem with Top Hat plans. Again, from the standpoint of the employee. These plans are usually unfunded which means it’s simply a promise to pay. An employer may refuse to pay benefits owed under the plan because of a merger, acquisition, insolvency, or other reason.

Now here’s the irony in all this. An employee who is part of this select group gets there because of performance. Now it will be the company’s performance that will determine what the employee gets.