When a nonqualified deferred compensation plan qualifies as a “top-hat” plan under the regulations of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), the benefits of that particular classification to an employer are that the plan is exempt from various reporting, disclosure and funding rules. These exemptions can significantly ease an employer’s administration and maintenance of a nonqualified deferred compensation plan. Because of this simplicity, employers are more willing to offer these types of nonqualified deferred compensation arrangements and thereby offer an additional tax deferral opportunity to the select group of employees participating in the plan. However, not appropriately qualifying for the top-hat exemption means that a non-qualified deferred compensation plan can be recharacterized as a tax-qualified plan and therefore, unintentionally being required to legally expand eligibility for the deferred compensation plan to a much larger, unanticipated group of employees. Therefore, getting the top-hat qualification right is critical for the plan sponsor’s protection.
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