For Executives Only, CEOs Amass Billions in Savings With ‘Top Hat’ Plans

The top five executives at the large publicly traded companies in the S&P 500 index held a combined $8.9 billion in these plans, often referred to as top hat plans, according to a report issued by two nonprofits including the Institute for Policy Studies. The average balance of $14.6 million for CEOs with those plans rose to $19.4 million once the value of pensions were included.

The CEO financial stockpiles are made possible by savings plans that are typically reserved for highly paid executives. Tax law allows executives to defer up to 100% of their compensation without paying income tax on the money until they withdraw it.

“People’s minds are blown when they see the wage gap between CEOs and workers. But the gap between CEO and worker retirement benefits is so much wider," said Sarah Anderson, an author of the report who focuses on topics including CEO pay at the Institute for Policy Studies.

CEOs who use top hat plans, also known as nonqualified plans, often withdraw the proceeds after they retire.

The average worker with a retirement savings plan administered by Vanguard Group had an account balance of $112,572 as of year-end 2022. The median balance was $27,376, a 23% decrease since year-end 2021.

Median household income in the U.S. was $70,784 in 2021, according to the U.S. Census Bureau. In contrast, the median pay package for S&P 500 CEOs was $14.5 million in 2022, down from a record $14.7 million the previous year. The decline marks the first time in a decade that compensation for top executives at the biggest U.S. companies didn’t reach new highs.

Companies that sponsor top hat plans include Walmart, Home Depot, Hyatt Hotels and Nike, said the report, also written by Jobs With Justice, a nonprofit dedicated to workers’ rights.

Company representatives and executives say that the balances in executives’ accounts often reflect deferrals and appreciation over many years.

Paul Saville, former CEO of home builder NVR, had a balance of $488 million in a deferred-compensation plan as of Dec. 31, 2022, according to the report, which analyzed data from recent company filings with the Securities and Exchange Commission and the U.S. Department of Labor.

NVR’s SEC filings confirm the balance. Saville is now executive chairman of the board.

Michael Neidorff, the former CEO of Centene, a health insurance provider to Medicaid and Medicare recipients, among others, had a balance of $328 million in the company’s deferred compensation table as of Dec. 31, according to the company’s proxy statement.

Neidorff died last year. When the account owner dies, the assets typically go to heirs, said Anderson.

A spokesperson for Centene said Neidorff had $18 million in the company’s nonqualified deferred compensation plan at the time of his death. The additional more than $300 million was part of a 2004 stock award, according to the spokesperson.

Walmart CEO Doug McMillon held more than $169 million, a sum that would generate a monthly check of about $1 million for a 65-year-old man using it to buy an immediate annuity, according to the report.

Median annual pay at Walmart, which employs about 1.6 million people in the U.S., was $27,136 in fiscal 2023, according to the report. Among workers eligible for Walmart’s 401(k) plan, more than 40% had no savings at all in the plan, the report said. The average balance was $19,753 at the end of 2021, the report said.

A company spokesman said McMillon has been deferring a portion of his compensation for years. He said Walmart offers a 6% 401(k) match, which cost the company more than $1.4 billion last year. The company recently raised its average U.S. hourly wage to more than $17.50 an hour, he said, adding that store managers earn an average of more than $200,000 a year.

The report found that 64% of CEOs at S&P 500 firms had savings in top hat plans, which have been around for decades.

Much like 401(k) plans, they allow eligible employees, typically executives, to funnel compensation into the plan without paying income tax. Instead, they pay tax when they withdraw the money, and benefit from the tax-free compounding of investment gains. Under the law, top hat plans have no caps, although companies can impose limits, said Anderson.

The plans are intended to give highly paid executives a chance to accumulate enough to replace a significant portion of their preretirement income. That’s not always possible for executives to do in a 401(k) plan, since the law caps tax-advantaged contributions to 401(k) accounts at $22,500 this year, a threshold that rises to $30,000 for workers 50 and older.

As with 401(k) plans, companies have the option to provide matching contributions to top hat plans.

According to a 2020 report by the U.S. Government Accountability Office, more than 400 of the S&P 500 companies offered such plans to almost 2,300 top executives in 2017. From 2013 to 2017, about 80% of companies with such plans contributed to them, the GAO report said.

Top hat plans have one major downside.

The money in them is considered a company asset until the executive withdraws it. As a result, if the company declares bankruptcy, executives are at risk of losing some or all of their savings. In contrast, the money in 401(k) plans is protected in a bankruptcy.

Write to Anne Tergesen at anne.tergesen@wsj.com