The Advisors' Blog

I’m not fluent in ERISA, but I still appreciated the takeaways from the Fourth Circuit’s decision last month in Milligan v. Merrill Lynch highlighted in this Gibson Dunn alert. The Fourth Circuit addressed whether Merrill Lynch’s WealthChoice Award program, which provided annual contingent cash awards to select high-performing financial advisors who remained continuously employed through an eight-year vesting period, was an ERISA-covered pension plan. A former advisor forfeited unvested awards when he voluntarily resigned, and filed a class action lawsuit alleging that the program violated ERISA’s vesting and anti-forfeiture requirements.

The court []surveyed decisions from other circuits and identified a non-exhaustive list of factors relevant to determining whether a program is a bonus payment plan rather than an ERISA pension plan:

– whether the program contemplates universal employee participation or imposes heightened eligibility requirements;
– whether the program is funded with money that would otherwise be immediately payable to the employee;
– whether the program is actually funded or instead involves phantom or notional investments;
– whether employees can unilaterally postpone payment until termination or beyond;
– whether the program is presented as a vehicle for obtaining retirement income; and
– whether firm performance affects program payments.

The court emphasized that these factors are not exhaustive and that not every factor must be present in every case.

Applying those factors, the Fourth Circuit held that the WealthChoice Award program “comfortably qualifie[d] as a bonus payment plan.” The court emphasized that the program was limited to high-performing advisors who met production thresholds; awards were contingent on continued employment and were not funded with money employees were otherwise immediately entitled to receive; notional accounts were unfunded and unsecured; vesting triggered automatic and mandatory payment; approximately 92% of advisors who were paid WealthChoice Awards between 2018 and 2024 were current employees; and the program was communicated as a retention and business-alignment incentive, not as a pension or retirementincome vehicle.

This may be the expected conclusion, but the alert says there are still some helpful structuring and communication takeaways from the facts the Fourth Circuit emphasized in its decision. For example:

– Long vesting periods do not necessarily create an ERISA pension plan. The Fourth Circuit rejected the notion that an eight-year vesting period, standing alone, transformed the WealthChoice Award program into an ERISA pension plan. The key question was not simply whether payment was delayed, but whether the program systematically deferred
income until termination or retirement or was designed to provide retirement income.

– Program design and communications matter. The court relied on how Merrill Lynch described and structured the program. Employers seeking non-ERISA treatment should consider whether plan documents, award agreements, and employee communications consistently describe the program as a bonus, incentive, performance, or retention arrangement—not as a retirement, pension, deferred compensation, or savings program.

– Employee control over payment timing can be important. The court distinguished arrangements in which employees may elect to defer compensation or choose payment at termination or retirement. In Milligan, advisors could not unilaterally defer payment; once the vesting conditions were satisfied, payment was automatic and mandatory. That
feature supported non-ERISA treatment.

– Unfunded notional accounts may support bonus-plan treatment. The program’s use of unfunded, unsecured notional accounts indexed to reference investments did not convert the arrangement into an ERISA plan. The court viewed those features as consistent with a contingent promise to pay a bonus, not as evidence that employees had deferred earned income.

– Meredith Ervine