3608 / What is an excess benefit pension plan? How is it taxed?

ERISA Section 3(36) defines an “excess benefit” plan as a nonqualified employee pension benefit plan maintained by an employer solely for the purpose of providing only those benefit amounts for certain “select employees” in excess of the limitations on contributions and benefits imposed by IRC Section 415 ( Q 3868). Curiously, ERISA Section 3(36) has never been amended to include the limitations on covered compensation imposed by IRC Section 401(a)(17) ($350,000 in 2025, $345,000 in 2024, $330,000 in 2023, $305,000 in 2022, $290,000 in 2021).¹ If an excess benefit plan cannot restore these benefits, its usefulness is limited.

One case seems to indicate that an excess benefit plan can replace benefits limited by IRC Section 401(a)(17), provided that the plan was never amended to take the 401(a)(17) limits into account.² On the other hand, in another case, a Supplemental Executive Retirement Plan ( Q 3540) intended as an excess benefit plan was held to be a “top hat” plan for a “select group” ( Q 3541), rather than an excess benefit plan, because it was not specifically limited to restoring benefits lost under IRC Section 415.³ Until ERISA is amended to add the IRC Section 401(a)(17) limits to the excess benefit plan exemption, this area of ERISA law is likely to remain muddled and pose a risk to its use by a plan sponsor. For this reason, a sponsor should attempt to use the ERISA “select group” exemption to cover a plan that also has an objective of restoring lost qualified plan benefits. This will prove easier for defined contribution plans than defined benefit plans.

A pure excess benefit plan under the ERISA exemption can be funded or unfunded as compared to an employee benefit pension plan for “select group of management or highly compensated employees” ERISA-exempt top hat plan that must be unfunded. If the excess benefit plan is unfunded (as defined for ERISA purposes), it apparently need not comply with any of ERISA’s requirements. Even if it is funded, an excess benefit plan is exempt from ERISA’s minimum participation, vesting, funding, and plan termination insurance provisions.⁴ However, the ERISA exemption does not drive income tax law, so a funded plan for ERISA purposes could be deemed a funded (secured) plan for income tax purposes and be currently taxable ( Q 3609). Depending on how it is structured such a plan might be subject to Section 409A or designed as a plan exempt under the short-term deferral rule. It is often made an employer contribution under a basic 409A voluntary account balance plan and may or may not be subject to vesting rules in the plan.

As noted, the alternative ERISA exemption is the so-called ERISA “top hat” exemption of ERISA Section 201(2) for a “select group of management and highly compensated employees.” However, as noted, the plan must be limited to only a select group of management, and also be unfunded to claim this exemption. The definition of the scope of this ERISA exemption has been a point of increasingly significant legal controversy for a number of years since most of the guidance comes from a sequence of federal cases.