Top Hat Plans

Written by Patricia Skinner
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Nonqualified retirement plans which are offered only to certain key employees and which are not subject to ERISA regulations are sometimes referred to as top hat plans because they tend to operate only at executive level. What they usually amount to are deferred payment plans that are used as a type of exclusive employee incentive. Careful attention needs to be paid to the details of these executive incentives, because they are not all the same and in the event that the company fails, employees could miss out.

Top hat plans are so similar to retirement plans that they are often actually referred to as supplemental retirement plans. Employees should take care to ascertain whether any top hat plans that they enter into are funded or unfunded. If they are unfunded it could mean that employees will lose benefits in the event of bankruptcy or a merger.

Beware of Unfunded Top Hat Plans

Another point to take note of is that no tax is paid on benefits from unfunded top hat plans until they are actually claimed. So if you haven't paid any tax on a scheme that you've been participating in for years, it could amount to quite a sum in the event. However, tax is paid as the contributions are actually paid into a fund by the employer in the case of a funded plan.

Although it would appear at first glance that unfunded top hat plans are not a very good option for highly paid executives, there are solutions. Financing companies or insurance companies may enter into an agreement with the employer to pay the funds when they become due. In this case, the employee can have more confidence in the third party assurance.

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