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CCH® PENSION — 01/30/12

District court must order plan committee to apply correct legal standard to top-hat plan issue

A district court erred when it failed to order a retirement plan committee to use the correct legal standard to determine whether the plan met ERISA's requirements for a top-hat plan, the U.S. Court of Appeals in Cincinnati (CA-6) has ruled. The appellate court reversed the district court's ruling that, because the plan was not a top-hat plan, the employer had violated ERISA's vesting and other substantive requirements.

Denial of benefits

Former employees who participated in an employer's Account Executive Nonqualified Defined Benefit Plan brought suit in state court for breach of contract, arguing that the employer had failed to pay benefits owed to them under the plan. The employer successfully removed the case to federal court on ERISA preemption grounds. The court then stayed the litigation, pending the outcome of the plan's administrative review.

The plan committee denied the participants' application for benefits, concluding that under plan terms the participants had forfeited their right to benefits, in part by terminating their employment. It also determined that the plan violated no substantive provisions of ERISA because it was a top-hat plan not subject to those provisions. The district court determined that the plan was not a top-hat plan and thus had failed to comply with ERISA's vesting requirements.

Jurisdictional issue

On appeal, the court first rejected the employer's argument (raised only after three years of litigation and a negative outcome at the district court level) that the district court lacked subject matter jurisdiction over the case because the plan did not fit the definition of an "employee pension benefit plan" covered under ERISA. Under the Supreme Court's ruling in Arbaugh v. Y&H Corp., 546 U.S. 500 (2006), the existence of an ERISA plan must be considered as an element of a plaintiff's claim under ERISA §502(a)(1)(B), not a prerequisite for federal jurisdiction. The employer effectively waived its right to raise that objection to the participants' claim by failing to raise it until the district court awarded summary judgment to the participants.

Top-hat plan

The district court correctly rejected the plan committee's decision regarding the top-hat issue, because the plan committee failed to apply the appropriate legal standard in making its decision. However, the lower court erred when it substituted its own de novo review of the issue, concluding the plan was a top-hat plan. When the problem is the validity of a plan's decision-making process, the appropriate remedy is to remand to the plan administrator, with instructions that the correct legal standard be applied.

Source: Daft v. Advest, Inc. (CA-6).

For more information, visit http://www.wolterskluwerlb.com/rbcs.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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