1. The University of Memphis
United States Court of Appeals Reverses Top Hat Violation of ERISA's Anti-Cutback Rule
Stephen T. Carter
Tax Research & Theory ACCT 7510
Dr. Craig J. Langstraat
December 12, 2014

2. Carter 1
United States Court of Appeals Reverses Top Hat Violation of ERISA's Anti-Cutback Rule
A "top hat plan" is a defined benefit pension plan that does not require a limit on the
amount of compensation that may be recognized. Top hat plans are unfunded and maintained by
an employer primarily for the purpose of providing deferred compensation for a select group of
management or highly compensated employees. Unlike opt-in retirement plans, a top hat plan is
often exempt from many government regulations. Hence, the interest rate associated with the
plan is usually higher than that offered by traditional retirement plan. Top hat plans allow
executives with salaries above the compensation limit to ensure retirement income that is closer
to their pre-retirement income. They permit an employee to defer some compensation until
retirement, when the employee may be in a lower tax bracket. 1
Cost of living adjustments (COLA) 5
, may impact the net present value of a top hat plan
resulting in an unfavorable tax treatment. The Employee Retirement Income Security Act of
1974 (ERISA) protects the retirement assets of Americans by implementing rules that qualified
plans must follow to ensure that plan fiduciaries do not misuse plan assets. Because top hat
plans are exempt from some of ERISA’s requirements, the treatment of COLA may constitute a
violation based on whether an interconnected plan is viewed as separate and distinct.
Additionally, the following research addresses how top hat plans with ambiguous contract terms
are to be interpreted under discretionary authority.
Statutory Background:
"Top Hat" plans are unique under provisions of Employment Retirement Income Security
Act (ERISA), 29 USCS §§ 1001 et seq. Because these plans are intended to compensate only
highly-paid executives, and such employees are in strong bargaining position relative to their

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employers, they are free from some requirements that are imposed upon most ERISA plans, in
order to protect those employees covered by such plans in that "Top Hat" plans are not subject to
ERISA's requirements for vesting and funding under 29 USCS §§ 1051(2), 1081(a),
Administrators of these plans are not subject to ERISA's fiduciary requirements under 29 USCS
§§ 1051(2), 1081(a), 1101(a). Although top hat plans are exempt from ERISA requirements
regarding participation and vesting, funding, and fiduciary responsibilities, they are subject to
ERISA's reporting, disclosure, administration, and enforcement requirements. 1
Keys to determine of whether a plan is "funded" or "unfunded" under 29 USCS §
1051(2), part of Employee Retirement Income Security Act of 1974 are (1) whether beneficiaries
of the plan can look to separate themselves from general assets of corporation to satisfy their
claims; and (2) whether beneficiaries of the plan have legal right greater than that of general,
unsecured creditors to assets of a corporation or to some specific subset of corporate assets;
Courts may also consider plan's intended and actual tax treatment.
In an action under the Employee Retirement Income Security Act of 1974 (ERISA), 29
U.S.C.S. § 1001 et seq., under Goldstein 7
, a plan administrator's interpretations of ambiguous
terms are given deference, subject to the covenant of good faith and fair dealing, if the plan in
question includes a grant of discretionary authority. The U.S. Court of Appeals for the Third
Circuit has routinely treated “top hat” plans differently from other kinds of plans. They are
considered to be unilateral contracts, whereby neither party's interpretation is entitled to any
more deference. Under ordinary contract principles, however, a court gives full effect to any
provisions in a top hat plan that grant a plan administrator’s discretion to interpret ambiguous
plan terms. The administrator's interpretation is, in all events, subject to de novo review as to
whether a party has complied with its good-faith obligations.

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As a general matter, the administration and interpretation of an ERISA plan are fiduciary
acts. However, it is well established that there is no cause of action for breach of fiduciary duty
involving a top hat plan. ERISA also contains an anti-cutback provision, pursuant to which the
accrued benefit of a participant under a plan may not be decreased by an amendment of the plan,
other than an amendment described in 29 U.S.C.S. §§ 1082(d)(2) or 1441. 29 U.S.C.S. §
1054(g)(1) which states that an accrued benefit is reduced on account of any increase in his age
or service is illegal. But top hat plans are exempt from ERISA's substantive vesting rules,
including the anti-cutback provision. 29 U.S.C.S. §§ 1051(2), 1101(a)(1).
Prior Case Law
In 2001, Goldstein, 7
an appellant challenged the judgment of the United States District
Court of New Jersey in favor of appellee’s former employer following a bench trial, in a case
where appellant claimed additional benefits under a "top hat" plan, pursuant to 29 U.S.C.S. §
1132. The court concluded that, although courts need not defer to the construction of disputed
contract terms given by administrators of "top hat" plans, effect must be given to all of the terms,
including those conferring discretion on the administrators. The grant of discretion to the plan
administrator to interpret the appellee plan's terms was broad, in that the administrator was given
sole authority to interpret its provisions, and the administrator's actions were to be final.
Moreover, the District Court's factual conclusion that the administrator, at all times, acted
in good faith with respect to the employee's claim was not clearly erroneous. The dispute in this
case centers around the proper characterization of an unusual form of compensation that
Goldstein7
received during his tenure at J&J7
. The question is whether this compensation, which
involved paying to Goldstein7
a specified percentage of the sales of products he developed,

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should have been taken into account for the purpose of determining his monthly pension under
the terms of J&J's retirement plans. Goldstein7
argues that these payments should have been used
to calculate his pension; the plan administrator disagrees. Here, the grant of discretion to the plan
administrator to interpret the plan's terms was broad, in that the administrator was given "sole
authority" to "interpret the provisions" of the plan, and the administrator's actions were to be
"final and conclusive for all persons." Moreover, the District Court's factual conclusion that the
administrator at all times acted in good faith with respect to the employee's claim for benefits is
not clearly erroneous. Accordingly, the court affirmed the judgment of the District Court denying
Goldstein's7
claim for additional benefits.
Battoni v. IBEW Local Union No 102 Plaintiffs6
, union members and vested participants
in a pension plan, sued defendants, trustees and pension and welfare plans of a merged union
chapter, alleging violations of the Employee Retirement Income Security Act (ERISA), 29
U.S.C.S. § 1001 et seq. This case arose after the merger of two local union chapters and the
merger of the pension plans and welfare plans of the two local businesses. The pension plan for
one of the local businesses had permitted participants the option to take retirement benefits as
either a lump sum or a monthly pension. The right to take benefits as a lump sum was a vested
right that had accrued for purposes of ERISA's anti-cutback rule. After the merger, the newly-
merged welfare plan adopted an amendment that eliminated welfare plan benefits for any
participant of the welfare plan who had made an election to receive a lump sum benefit from the
pension plan. The instant litigation was a challenge to this amendment on the grounds that it
constituted a pension plan cut-back, in violation of ERISA's anti-cutback provision.
The court found that because the amendment was tied to an election in the pension plan,
it was a constructive or indirect amendment which had the effect of reducing the participants'

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vested accrued right to make a lump sum election. The court found that the welfare plan
amendment at issue violated the anti-cutback provisions of ERISA, 29 U.S.C.S. § 1054(g)(1).
Ambiguity was explicitly discussed in the Baldwin v. Univ. of Pittsburgh Med case8
in
which the plaintiff’s adoptive mother, as the guardian of minor children8
, sued defendants, an
employer and an insurance company, under the Employee Retirement Income Security Act
(ERISA), 29 U.S.C.S. §§ 1001-1461, seeking the proceeds of insurance policies. The United
States District Court of Pennsylvania dismissed the complaint for lack of standing and subject-
matter jurisdiction. The adoptive mother appealed.
The adoptive mother adopted three children. 8
The biological mother of the children
maintained a parental relationship with the children and lived with them and the adoptive mother
for three years after they were adopted. The biological mother enrolled in four insurance policies
offered by her employer and designated the adoptive mother as the beneficiary for one basic life
policy, but she did not designate a beneficiary for the remaining policies. After the biological
mother died, the insurance company rejected the adoptive mother's claims on behalf of the
children for the proceeds from the other three policies, finding that the children were no longer
considered the biological mother's "children" for the purposes of the policies' default-beneficiary
provisions.
The appellate court determined that the children and the adoptive mother had ERISA
standing because the allegations, while insufficient to resolve the potential ambiguity of the term
"children" in the policies, were sufficient to make out a justifiable claim that such an ambiguity
existed and that the children were or could become entitled to benefits based on one arguably
objectively reasonable meaning of the term. 8
The appellate court reversed the District Court's

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judgment and remanded to the district court for further proceedings. This case expressed that
words of the contract clearly manifest the parties' intent if they are capable of only one
objectively reasonable interpretation. A contract is unambiguous if it is reasonably capable of
only one construction. If the words of the contract are capable of more than one objectively
reasonable interpretation, the words are ambiguous. Ambiguous terms that appear clear and
unambiguous on their face, but whose meaning is made uncertain due to facts beyond the four
corners of the contract, suffer from latent ambiguity. 8
Main Case
Robert J. Zebrowski, Robert A. Woodruff, and Gregory Bialy, are former executives of
RohMax USA, Inc. According to a complaint filed in by Robert Zebrowski, defendant, Evonik
Degussa Corporation Administrative Committee, wrongfully denied payment of their vested
retirement benefits and violated its duties as administrator and fiduciary of the other two
defendants Evonik Degussa Corporation Retirement Plan (pension plan) and Evonik Rohmax
USA, Inc. Non-Qualified Pension Plan (top hat plan). The claims are made for monetary,
equitable, and declaratory relief under the ERISA statute.
When plaintiff Zebrowski retired at age 60 on November 30, 2006, he elected lump sum
payment of his retirement benefits under each plan. At that time, the pension plan included
COLAs only if a participant elected a monthly annuity. Therefore, Zebrowski's pension plan’s
lump sum did not include COLA benefits that would have accrued if he had elected a monthly
annuity.
On December 30, 2008, about two years after he retired, the pension plan was amended
to retroactively allow COLAs for lump sum payments of benefits earned before December 31,

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2008. During the year following the amendment, plaintiffs Woodruff and Bialy also retired.
They elected lump sum payment of their retirement benefits under each plan. When plaintiff
Woodruff retired at age 62 on March 31, 2009 and plaintiff Bialy retired at age 62 on November
30, 2009, the pension plan allowed COLAs for lump sum payments.
In 2009, Evonik Degussa Corporation’s Administrative Committee sent Mr. Zebrowski a
letter stating that he had received a Supplemental Plan overpayment. Soon after, Mr. Zebrowski
filed a complaint in the United States District Court of Pennsylvania, contending that defendant
Evonik Degussa Corporation Administrative Committee wrongfully denied payment of their
vested retirement benefits and violated its duties as administrator and fiduciary of the other two
defendants, Evonik Degussa Corporation Retirement Plan (pension plan) and Evonik Rohmax
USA, Inc. Non-Qualified Pension Plan (top hat plan). On February 23, 2011, the Committee was
denied a motion to dismiss the complaint because the complaint appears to state claims for relief
that are "plausible on [their] face.”
On September 10, 2012, the Committee moved for a summary judgment on both the
complaint and defendant Evonik Degussa Corporation Administrative Committee's counterclaim.
The Committee's counterclaim against plaintiff Zebrowski asserts that a portion of his top hat
benefits were overpaid and should be paid back by him – for equitable relief under ERISA §
502(a)(3), 29 U.S.C. § 1132(a)(3). The plaintiffs cross-moved for partial summary judgment on
liability for pension benefits under ERISA, violations of ERISA's anti-cutback rule, breach of
fiduciary duties under ERISA, and "other appropriate equitable relief" under ERISA. The
Committee then moved for summary judgment on both the complaint and the counterclaim.
Defendants' Motion for Summary Judgment was denied, and a judgment was entered in favor of
plaintiff Zebrowski and against defendants as to "Defendant Evonik Degussa Corporation

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Administrative Committee's Counterclaim for Equitable Relief against Plaintiff Robert J.
Zebrowski.” The Plaintiffs' Motion for Partial Summary Judgment as to liability was granted,
and judgment is entered in favor of plaintiffs and against defendants as to liability on all claims
contained in Counts One, Two, and Three of the complaint. Count Four of the complaint is
dismissed as irrelevant. Listed below are the specific findings of the court that the defendants
are liable to:
1. Plaintiff Robert J. Zebrowski in the amount of $461,775 for past due plan benefits as
of February 1, 2009.
2. Plaintiff Robert A. Woodruff in the amount of $429,957 for past due plan benefits as
of April 1, 2009.
3. Plaintiff Gregory Bialy in the amount of $266,470 for past due plan benefits as of
December 1, 2009.
On November 20, 20122
, Plaintiffs move for prejudgment interest and "other appropriate
equitable relief" under ERISA § 502(a)(3), 29 U.S.C. § 1132(a)(3) following the determination
of defendants' liability for pension benefits under ERISA. According to defendants, the measure
of prejudgment interest sought is excessive. The court ruled that the plaintiffs' amended motion
to alter or amend judgment to include prejudgment interest was granted and prejudgment interest
shall be calculated in accordance with the November 20, 2012 2
memorandum and the amounts
to be assessed in favor of plaintiffs and against defendants shall be submitted to the court.
January 23, 20133
marks the date when the defendants moved for reconsideration of the
January 15, 2013 order, which dismissed a proposed supersedeas bond and denied the
application for a stay of proceedings to enforce the judgment of December 4, 2012 pending

10. Carter 9
appeal. The bond was deemed unsatisfactory in form and amount. Reconsideration will be
denied. The Committee was granted until Tuesday, February 5, 2013 within which to submit a
corrected supersedeas bond compliant. A supersedeas bond is an order by an appeals court
commanding a lower court not to enforce or proceed with a judgment or sentence pending the decision
on the appeal or until further order of the appeals court.
Finally, on August 19, 2014, The U.S. Court of Appeals ruled the following1
:
1. The district court erred when it held that the plan terms were unambiguous because
there was both ambiguity and a grant of discretionary authority in the supplemental
plan, which was a top hat plan under the Employee Retirement Income Security Act
of 1974.
2. The supplemental plan granted discretion to the employer's administrative committee.
3. There was no reason to believe there was anything less than good faith with respect to
the committee's interpretive work or that the committee did not exercise its discretion
reasonably.
4. The committee reached a reasonable interpretation of the supplemental plan, given
the contract's inherent ambiguity and the calculations necessary under complex
pension plans.
5. Because the plans were separate, the committee's interpretation of the supplemental
plan did not effect a cutback of the pension plan.
The parties do not dispute that, under this example, each Appellee should receive $105 in
a Pension Plan lump sum payment ($100 Pension Plan benefit plus a $5 COLA amount). The
parties do dispute how to calculate the Supplemental Plan benefit. 1

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Using Appellees' interpretation, the $5 COLA amount is not added to Factor B. Thus,
each Appellee's Supplemental Plan benefit equals Factor A - Factor B, or $200 - $100, which
equals $100. Adding this Supplemental Plan benefit of $100 to the Pension Plan Benefit of $105,
each Appellee ends up with $205. Hence, the beneficiary of the pension account would have, at
the end of the day, a greater benefit after the levying of a Pension Plan COLA entitlement than
before. Notably, the Supplemental Plan calculation is the same both before and after disbursing
the Pension Plan COLA entitlement. 1
On the other hand, Using the Committee's interpretation, , the $5 COLA amount is added
to Factor B, thus, each Appellee's Supplemental Plan benefit equals Factor A - Factor B, or $200
- $105, which equals $95. Adding this Supplemental Plan benefit of $95 to the Pension Plan
Benefit of $105, Appellee ends up with $200. 1
Most importantly, under the Committee's interpretation, each Appellee would take home
$200 at the end of the day whether or not there was a COLA entitlement disbursed with the
Pension Plan benefit. Put another way, if each Appellee had not received a $5 COLA amount
with his Pension Plan benefit, such that the Pension Plan benefit equaled $100 instead of $105,
the Supplemental Plan benefit would equal $100 (Factor A - Factor B, or $200 - $100), and each
Appellee would still receive only $200 from both plans. 1
Thus, the Committee's interpretation, in practical terms, appears flawed according to the
judge. Under the example presented above, there would be no reason for Appellees to even ask
for a COLA amount with the Pension Plan benefit because—under the Committee's
interpretation—each Appellee would receive the same $200—in combined Pension Plan and

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Supplemental Plan benefits—whether or not he had a COLA amount added to his Pension Plan
benefit. 1
Conclusion
The 3rd
Circuit of the U.S. Court of Appeals reversal of the District Court’s decision of
denying the Committee’s motion to dismiss the complaint was based around three main
concerns. Ambiguous contract terms, the grant of discretion, and a breach of ERISA's fiduciary
and anti-cutback provisions were concerns examined closely by the court and led to the reversal.
Because one can make a reasoned argument for both the District Court's reading and for
the different reading given by the Committee, the pertinent provisions of the Supplemental Plan
are, by definition, ambiguous. The District Court thus erred when it reached the contrary
conclusion. Both ambiguity and a grant of discretionary authority were present in the
Supplemental Plan. (The District Court did not apply the rule for top hat plans set forth in our
decision in Goldstein v. Johnson & Johnson7
, holding that the plan terms here were unambiguous
and so it did not apply the Goldstein 7
standard of deference to the Committee's interpretation.)
According to the District Court, Article 6.1 provides a formula to calculate Pension Plan benefits
that produces an annuity for Factor B which would not include the annual COLA1
.
The 3rd
Circuit of the U.S. Court of Appeals disagreed that Article 6.1 was plainly
incorporated into the "Factor B" formula of the Supplemental Plan. It is far from plain how, if at
all, Article 6.1 affects the calculation of Factor B. Throughout the rest of the Supplemental Plan,
when the drafters intended to incorporate a term from the Pension Plan, the section or article
number of the Pension Plan was included with its capitalized title. 1
The judge also noted that the
Supplemental Plan sections 2.36, 2.37, 13.2, and Article IV contain the same format for

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references to the Pension Plan. That format was not used in the "Factor B" language to reference
terms of the Pension Plan. In fact, Factor B does not mention how Pension Plan benefits are to be
calculated at all, let alone whether a COLA should be included.
Article XV of the 1999 Supplemental Plan, at section 15.2.3, gives the Committee the
authority to "interpret the provisions of the Plan in all particulars." Even if, as the Appellees
argue, the 1999 version of the plan — not the 2008 version — is applied, the language of the
1999 Supplemental Plan is sufficient to establish the Committee's discretionary authority.
The primary question presented to the Court is not whether the Committee's
interpretation offers the best reading of the contract; rather, given the discretion granted to the
Committee, the question is whether the interpretation offered by the Committee was reached in
good faith. The judge expressed that record does not convincingly demonstrate intentional bad
faith or ill-motive on the defendants' behalf1
. That factual determination is supported by the
record, and there is no reason to believe there was anything less than good faith with respect to
other aspects of the Committee's interpretive work or that the Committee did not "exercise its
discretion reasonably.”
The dissent, on the other hand, concluded that the Committee's interpretation was
unreasonable. The 3rd
Circuit of the U.S. Court of Appeals decided that the District Court’s
discussion of reasonableness, however, is flawed because it dismisses the attendant change in the
law based on the Williams decision — that prompted the Committee's interpretation. The court
did not find persuasive an argument that the existence of other possible interpretations rendered
the Committee's decision unreasonable. In reviewing the reasonableness as if the Committee
arbitrarily decided in 2008 to change the Supplemental Plan calculations, The Committee's

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interpretation of how the Supplemental Plan benefits were to be calculated, however, was based
on the Pension Plan amendment, prompted by Williams, and the attendant complexity of the
lump sum calculations. 1
While the dissent's review of the record highlights the ambiguity of the
contract here, it was decided that it did not make the Committee's interpretation unreasonable.
The record established that the Committee reached a reasonable interpretation of the
Supplemental Plan, given the contract's inherent ambiguity and the calculations necessary under
complex pension plans such as those before us. There was nothing unreasonable about one
interpretation over the other when the plan is "reasonably susceptible" to either meaning put
forth by the parties. As in Goldstein7
, the court looked to the Committee's substantive
interpretation of the plan and conclude that there was "no inherent unreasonableness in the
substantive interpretation" that would give rise to an "inference of bias or bad faith.” Such
findings led to the reversal of the District Court's order granting summary judgment to the
Appellees because the terms of the Supplemental Plan are ambiguous and so are subject to the
Committee's good faith interpretation.
The administration and interpretation of an ERISA plan are fiduciary acts and it is well
established that there was no cause of action for breach of fiduciary duty involving a top hat
plan. ERISA also contains an anti-cutback provision, pursuant to which the accrued benefit of a
participant under a plan may not be decreased by an amendment of the plan, other than an
amendment described in section 1082(d)(2) or 1441, but top hat plans are exempt from ERISA's
substantive vesting rules, including the anti-cutback provision.10
The appellees nevertheless
relied on Battoni 6
and contend that the ordinary fiduciary duty and anti-cutback rules apply
because the plans at issue in this case are so interconnected that the Committee's interpretation of

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the Supplemental Plan was an amendment that effectively reduced benefits under the Pension
Plan. 1
The U.S. Court of Appeals disagreed with the District Court’s rejection of the Appellants'
argument that the plans are separate because it believed that the Committee 1
"gave with one
hand" and "took away with the other" when it increased Pension Plan lump sum payments by the
COLA, but decreased Supplemental Plan lump sum payments by the same amount. The court’s
analysis hinged on whether the two plans were, as the Appellants argue, two separate plans, or
were so intertwined that, as the Appellees say, the statutory protections of ERISA should apply
when ordinarily they would not. When the court looked at the terms of the plans themselves and
the separate provisions under ERISA, they concluded that the plans were indeed separate and
distinct. Additionally, the instances where the Supplemental Plan incorporates the Pension Plan
are clearly defined in a way that indicates the drafters' intent not to entirely read one plan into the
other. The judge noted that if the court was to hold as the District Court did, ERISA's specific
top hat rules would be substantially undermined because statutory provisions pertaining to
regular pension plans could regularly be read into top hat plans, contrary to Congress's intent to
provide fewer protections for top hat beneficiaries. 1
Because the plans are separate, the Committee's interpretation of the Supplemental Plan,
which is a top hat plan, did not effect a cutback of the Pension Plan. Even if Battoni6
were
relevant, however, it would not aid the Appellees because it requires a party making an anti-
cutback claim to show that a plan was amended, and that the amendment decreased an accrued
benefit. The Appellees cannot establish either of those elements. There was no "amendment,"
either constructive or otherwise, when the Committee interpreted the plan, and the Appellees'

16. Carter 15
benefits were not decreased because they received the COLA owed to them under the Pension
Plan. In short, the 3rd
circuit of the U.S. Court of Appeals decided that there was not a cutback. 1

17. Endnotes
1
Zebrowski v. Evonik Degussa Corp. Admin. Comm., U.S. Court of Appeals. (3rd Cir. Pa., Aug.
19, 2014)
2
Zebrowski v. Evonik Degussa Corp. Admin. Comm., (U.S. District Court. Pa., Nov. 20, 2012
3
Zebrowski v. Evonik Degussa Corp. Admin. Comm., (U.S. District Court Jan. 23, 2013
4
Zebrowski v. Evonik Degussa Corp. Admin. Comm., (U.S. District Court Sept. 10, 2012)
5
Zebrowski v. Evonik Degussa Corp. Admin. Comm., (U.S. District Court. Pa., Feb. 23, 2011)
6
Battoni v. IBEW Local Union No. 102 Employee Pension Plan, 594 F.3d 230 (3d Cir. 2010)
7
Goldstein v. Johnson & Johnson, 251 F.3d 433, 442 (3d Cir. 2001)
8
Baldwin v. Univ. of Pittsburgh Med. Ctr., 636 F.3d 69, 76 (3d Cir. 2011).
9
§1054(g)(1)
10
§1082(d)(2)
11
§1001(a)(1)
12
§1001