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What Is a Top Hat Plan?

A top hat plan is a type of retirement plan, although it differs from the usual retirement plan in that a top hat plan is not offered to everybody in the company. A top hat plan is only offered to a select group of people in the company - usually to executives above a certain level. Sometimes, other employees are also offered top hat plans. Who receives offers for top hat plans really depends on the company’s policy. In some cases, merely being considered to be a top executive will not be enough to warrant an offer of a top hat plan. There may be companies wherein a key executive will not be offered a top hat plan while his subordinate may have a top hat plan.

Another big difference between a top hat plan and a regular retirement plan is that a top hat plan does not benefit from the tax-qualified status that opt-in retirement plans have. In this sense, a top hat plan suffers from a drawback.
In the United States, there are generally two kinds of top hat plans. They are Nonqualified Deferred Compensation (NQDC) and Supplemental Executive Retirement Plans (SERPs). The first type, NQDC, is similar to the 401 (k) and it allows the holders of a top hat plan to defer an unlimited amount of income. In contrast, funding for SERPs are left entirely to the employer. Furthermore, the benefits from SERPs are clearly defined from the outset.

Top hat plans are considered “unfunded”, meaning that it is entirely up to the employer to to pay out the benefits.

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