Court Views Top Hats as Unique Animal

May 31, 2001 (PLANSPONSOR.com) - In a key decision, a federal appellate court has held that "top hat" plans should be treated as unilateral contracts, rather than as a typical ERISA plan.
By PS

In Goldstein v. Johnson & Johnson, the Third US Circuit Court of Appeals held that the deference generally given an ERISA plan administrator’s interpretation should not apply in the case of top hat plans, which typically provide deferred compensation for a very select group of employees. 

The court did acknowledge that a particular plan may include a clause that gives the administrator interpretive discretion, rejecting the argument that such a clause effectively designates an interested party as an arbitrator. However, the court said that such a clause would not automatically act as a “legal trigger altering the standard of review.”

Top hat plans are unfunded and expressly exempted from most of the substantive ERISA requirements.

Case History

Plaintiff Gideon Goldstein was a prominent AIDS researcher who patented a drug now sold by Johnson & Johnson.  After Goldstein’s retirement in 1994, Johnson & Johnson’s pension committee determined that his monthly payments should be calculated solely on the basis of his salary.

Goldstein argued that his top hat pension benefits should have been calculated on the basis of all of his pre-retirement earnings, including the commissions on the sale of the drug he invented.  That would give him a pension of more than $30,000 per month, rather than the $7,600 provided under his employer’s calculations.

In defense of his position, Goldstein pointed to language in the plans that called for commissions to be counted.  However, the committee ruled that only the commissions of sales workers fell under that definition.

US District Judge Alfred M. Wolin of the US District Court for the District of New Jersey ruled that Johnson & Johnson’s interpretation, which excluded commissions from the calculation, was not unreasonable. 

Appellate Review

On appeal the 3rd Circuit acknowledged two key cases regarding judicial review of an ERISA plan’s terms.  In Firestone Tire & Rubber Co. v. Bruch, the Supreme Court held that courts should employ a deferential review if the ERISA plan vests the administrator with discretion.

In the second case, the 3rd Circuit added a caveat to that general rule in its ruling in Pinto v. Reliance Standard Life Insurance Co.  In that case, the court held that when the administrator is also the funder of the plan and therefore suffers from a conflict of interest, courts should employ a more “searching” inquiry, according to the Legal Intelligencer.

But in the Goldstein case, Chief US Circuit Judge Edward R. Becker wrote that while both Firestone Tire and Pinto are “premised on the analogy of an ERISA plan to a traditional trust,” courts have always treated top hat plans differently.

“However, a top hat plan is a unique animal under ERISA’s provisions,” the court said. “We have held that such plans are more akin to unilateral contracts than to the trust-like structure normally found in ERISA plans,” the court added. 

“Given the unique nature of top hat plans, we believe the holding of Firestone Tire requiring deferential review for the discretionary decisions of administrators to be inapplicable,” Becker wrote.

Contract Terms
 
Despite the lack of deference to the administrator’s interpretation, the court held that the application of ordinary contract law could rely on a clause that gives the administrator interpretive discretion.

Since Goldstein was suing under a top hat plan that gives the Johnson & Johnson committee complete discretion, the 3rd Circuit limited its review to the issue of

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