“Top Hat” Plan Assets Not Protected by ERISA

April 19, 2013 (PLANSPONSOR.com) – A court ruled an executive’s supplemental retirement plan assets are not protected from his employer’s creditors.

U.S. District Judge Catherine C. Blake of the U.S. District Court for the District of Maryland found Cecil Bank’s Supplemental Executive Retirement Plan (SERP) is a “top hat” plan under the Employee Retirement Income Security Act (ERISA) and therefore exempt from certain of ERISA’s protections intended by Congress to protect workers—specifically that ERISA plans contain an anti-alienation provision. Although the SERP did contain an anti-alienation provision, ERISA’s anti-alienation requirement does not protect Charles F. Sposato’s SERP benefits from garnishment by First Mariner Bank, a creditor of Cecil Bank, Blake determined.  

The court also ruled ERISA does not pre-empt Maryland garnishment law. The pre-emption provision in ERISA provides that the statute “shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan.”  Blake noted that in Mackey v. Lanier Collection Agency & Service Inc., the U.S. Supreme Court held that ERISA did not pre-empt Georgia’s garnishment law, a law of general application and only remotely related to employee benefit plans, and that Congress did not intend to preclude state-law attachment of ERISA welfare benefit plans.Blake said the analysis in Mackey applies to the SERP in the current case because Congress made a specific exception from the anti-alienation requirement for top hat pension plans in the same way it made an exception for welfare benefit plans.   

Sposato argued that, if his SERP benefits are subject to garnishment, Maryland law protects 75% of each benefit payment under an exemption for garnishment of wages, but First Mariner claimed the SERP benefits do not satisfy the definition of wages protected from garnishment as set forth by Maryland Commercial Code. Sposato raised a new argument that the federal Consumer Credit Protection Act protects from garnishment 75% of payments received pursuant to a pension or retirement program. Blake decided to reserve ruling on the issue of whether 75% of Sposato’s SERP benefits are protected from garnishment until the parties complete their briefs. However, she said at least 25% of his SERP benefits will be subject to garnishment despite the court’s future decision.  

The opinion in Sposato v. First Mariner Bank is here.