Formal Hat Plan

What Is a Top Hat Plan?

A formal hat plan is a type of employer-sponsored plan that is unfunded. The design of the plan is to give deferred compensation to the eligible employee group. In any case, participants in a formal hat plan are regularly high-positioning executives and directors.

How a Top Hat Plan Works

Formal hat plans contrast from standard employer-sponsored retirement plans like 401(k)s and 403(b)s. Dissimilar to those plans, formal hat plans are not intended to be tax-qualified. In this way, they don't normally offer a similar tax benefits of a pick in employer-sponsored plan. One of the primary qualifications of a formal hat plan is that, as the name suggests, just certain employees can sign up for and benefit from this plan. Each company will decide enrollment requirements for the sponsored plan. Not every person can take part. Even those of equivalent company height might have various plans.

Formal hat plans are unfunded, and that means that money contributed to them isn't held in trust for the employees. All things being equal, the assets stay the property of the employer company until the employee leaves. The employer picks who can take part and it can choose whether and the amount to contribute.

A nonqualified deferred compensation plan permits participants to concede income into the plan during each calendar year. A supplemental executive retirement plan is funded totally by the employer.

Benefits and Disadvantages of a Top Hat Plan

One critical benefit of a formal hat plan is that it doesn't have to go through non-separation testing by regulatory bodies. Individuals from the plan can contribute however much they please, an accomplishment not normal in traditional retirement plans that face annual limits. In any case, contributions to formal hat plans, for example, non-legislative 457(b) plans are promptly taxable. All distributions from formal hat plans are additionally subject to income tax.

By design, formal hat plans keep away from a couple of regulatory requirements. They are normally exempt from a few provisions connecting with funding, vesting, and interest. The plans additionally keep away from a few accrual and fiduciary obligations.

The Employee Retirement Income Security Act (ERISA) will oversee a formal hat plan. Consequently, it must meet a few specific requirements as well as some reporting and disclosure rules. For example, the Internal Revenue Service (IRS) requires reporting of all employee contributions and employer deferrals to formal hat plans. Contributions show up on the plan support's Form-W2.

The plan may likewise have to contain specific highlights like loans, emergency distributions, and age-based get contributions. Likewise, the plan must apply for formal hat status with the Department of Labor and keep a copy of the application.