Companies that consider nonqualified deferred compensation arrangements for their key executives often focus on how those arrangements are treated for tax purposes. But in the midst of the tax discussion, don’t lose track of the other federal law that governs these arrangements: the Employee Retirement Income Security Act (ERISA).

The phrase “top-hat plan” is commonly used to refer to nonqualified deferred compensation arrangements generally, and to the treatment of those arrangements under ERISA in particular. Yet, it never appears in the text of the statute.

Such arrangements allow employers to provide benefits to key executives in excess of the benefits that may be provided through qualified retirement plans. In order to provide those benefits only to the targeted individuals, however, top-hat plans cannot be subject to the minimum participation, funding, and vesting rules that generally require employers to make benefits available to all employees on a nondiscriminatory basis.

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