Compliance August 16, 2006

Deferred Comp Plan Not a Top Hat

August 16, 2006 (PLANSPONSOR.com) - Because an employer allowed non-management non-highly compensated staff members to be in a deferred compensation plan, the program would not be considered exempt from federal benefits law, a judge has ruled.
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District Judge T.S. Ellis III of the US District Court for the Eastern District of Virginia said the Khoury Brothers Jewelers deferred compensation plan was not a top hat plan that would be outside of the fiduciary, funding, vesting and participation requirements of the Employee Retirement Income Security Act (ERISA). Ellis refused the company’s request to throw out the suit by plaintiff Suzanne Guiragoss.

Ellis said the employees in the plan weren’t management or highly compensated and that one participating worker, a sales clerk, was the kind of worker ERISA was aimed at.  

“Guiragoss had no influence on the terms of the (plan) agreement and never consulted with an attorney prior to signing the agreement,” Ellis wrote. “Guiragoss is precisely the type of employee that ERISA’s substantive provisions are intended to protect and Khoury Brothers cannot be permitted to use top hat designation to shield it from liability.”

According to the ruling, Guiragoss began working for Khoury Brothers Jewelers in 1994 as a sales clerk. Khoury Brothers had created a deferred compensation plan in 1992. The plan provided that benefits would vest on the tenth year of the employee’s service.

In Guiragoss’s second year, Guiragoss joined the plan at Fouad Khoury’s invitation. Another sales clerk was also a participant. The plan’s membership increased to three participants in 1997, but when the firm set up its 401(k) plan, two workers dropped out, leaving only Guiragoss, the court said. Khoury allegedly told Guiragoss that Khoury Brothers would credit 50% of her bonuses to her deferred compensation account, the court said.

After 10 years of service, Guiragoss was surprised to learn Khoury Brothers had credited almost no money to her account and she resigned, the court said. Although Guiragoss demanded more than $169,000 in benefits, Khoury Brothers paid her $4,600 for the actual amount it credited to her account, minus taxes. Guiragoss sued the company, charging that it had breached its ERISA fiduciary duties.

The court found the plan was governed by ERISA because it was an employer-sponsored plan, established to provide retirement benefits. Guiragoss could not be considered a highly compensated employee because her salary was closer to the lowest paid than the highest paid employee, the court said.

The case is Guiragoss v. Khoury, E.D. Va., No. 1:06cv187, 8/10/06.

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