The Employee Retirement Income Security Act
(“ERISA”) regulates the operation of private sector employee
benefit plans once a plan has been established by an employer. ERISA
requires employers to implement certain safeguards for employee
benefit plans by setting minimum standards for things such as for
participation, vesting, benefit accrual, funding, and reporting. In
addition, ERISA establishes fiduciary responsibilities for plan
administrators. ERISA generally defines a fiduciary as anyone
who exercises discretionary authority or control over a plan's
management or assets, including anyone who provides investment advice
to the plan.
Generally, when a plan participant has a claim for
benefits, there are specific procedures that must be exhausted.
The claims and review process is usually spelled out in the Summary
Plan Description. If a claim for benefits is denied, ERISA
requires that the reason for any denial of benefits is explained to
the employee in writing and that employee must be given an
opportunity for full and fair review of the decision through an
internal appeals process.
If benefits are again denied after the internal
appeals process, the employee can then file a claim in court.
Generally, the reviewing court applies a de novo standard
(allowing the court to substitute its own judgment) when reviewing a
claim denial, unless the language of the plan gives the plan
administrator discretion to interpret and apply the plan. If a
plan provides such discretion, the reviewing court applies an abuse
of discretion standard and gives the benefit denial deferential
treatment. When announcing this standard of review, the Supreme
Court in Firestone Tire and Rubber Co. v. Bruch reasoned that
since the plan administrator is a fiduciary, his or her exercise of
discretion should not be subject to control by the court.
This standard of review poses significant problems
for ERISA top-hat plans. To be designated a top hat plan, ERISA
requires that the plan be (1) unfunded and (2) maintained by an
employer primarily for the purpose of providing deferred compensation
for a select group of management or highly compensated employees.
Top hat plans are specifically exempt from ERISA’s provisions on
participation, vesting, funding, and fiduciary responsibility but are
subject to ERISA’s enforcement provisions. Thus, top-hat
plans are merely contractual agreements.
Top-hat plans are unique in that plan participants
must utilize ERISA’s enforcement provisions when challenging
benefit denials, yet none of the substantive and fiduciary provisions
apply to such plans. Under ERISA (modeled after trust law) a
plan administrator or fiduciary is required to make all decisions in
the plan participant’s best interest. However, since top-hat
administrators are not fiduciaries, they are not required to make any
decisions in the best interest of the top-hat plan participant.
Since an unfunded top-hat plan is essentially an unsecured promise to
pay benefits at termination or later, an inherent conflict of
interest is present when the role of the plan administrator and
employer overlap. Paying the benefits to the top-hat plan
participants will always have a direct and immediate impact on the
cost to the employer.
Furthermore, when a plan confers discretion upon the
administrator in a top-hat plan, the trust principals relied on by
the Supreme Court in Firestone are not present. If
following the holding in Firestone, the decision of a plan
administrator with discretion to interpret and apply the plan, owing
no fiduciary duties to the top-hat employees and where a conflict of
interest is present, would still be subject to an abuse of discretion
standard. This hardly seems fair when top-hat employees are
afforded no remedies under fiduciary duty claim and their plans are
not required to be funded. This nearly renders the promises and
obligations of the employer illusory.
After the holding in Firestone, courts have
grappled with whether or not to apply the abuse of discretion
standard to top-hat plans because of their unique nature. The
Eight Circuit has concluded de novo review applies to top hat
plans even when it give their administrators interpretive discretion
because “a top hat administrator has no fiduciary responsibilities”
under ERISA. The Third Circuit has also declined to extend the
holding in Firestone to top-hat plans because top-hat plans
are unilateral contracts and the principals of federal common law
should be applied.
However, without a discussion distinguishing top-hat
plans from ordinary ERISA plans, the Seventh and Second Circuits have
held that the abuse of discretion standard articulated in Firestone
applies to top-hat plans that provide the administrator with
discretion. The Ninth Circuit also held that abuse of
discretion standard applies to top-hat plans with discretionary
language reasoning that the application of a de novo standard
does not materially change the outcome and applying a different
standard to top-hat plans would create unnecessary confusion.
The Sixth Circuit sided with the Ninth Circuit’s reasoning that
“the same conclusion would be reached under either standard,”
although it was unclear whether it was applying that reasoning solely
to the case at bar or more broadly. The remaining Circuits have
taken no position.
Therefore, top-hat ERISA participants have a higher
burden to overcome in “abuse of discretion” circuits than in “de
novo” circuits.
