Appeals Court: Merrill Lynch Incentive Program Not Subject to ERISA

A federal appeals court has ruled that a long-term incentive program used by Merrill Lynch does not qualify as a retirement plan under the Employee Retirement Income Security Act. Furthermore, the court outlined a multi-factor test that could be applied in other courts.

The decision issued by the U.S. 4th Circuit Court of Appeals in Milligan v. Merrill Lynch et al. turned on whether the firm’s eight-year vesting compensation program fell under the protections of ERISA. A three-judge panel concluded that it did not, emphasizing that the plan functioned as a bonus, rather than a pension.

Central to the ruling was a six-part framework the court used to distinguish between a bonus program and a retirement plan. The factors examined included:

• eligibility requirements;
• whether compensation was actually deferred;
• whether accounts were funded or merely notional;
• whether employees controlled payout timing;
• whether the plan was marketed as providing retirement income; and
• how payments were tied to firm performance.

But beyond the legal framework, one data point also proved especially decisive: Only 8% of payouts occurred after employees left the company.

That figure, the decision stated, demonstrated the absence of “systematic deferral” to the end of employment, a key requirement for ERISA coverage. Instead, about 92% of payments were made while employees were still working, reinforcing the conclusion that the plan was designed to reward performance and retention—not provide retirement income.

Legal analysts say statistics may carry outsized influence going forward.

“The 8% number was a huge factor,” says Don Mazursky, a senior counsel at Smith, Gambrell & Russell, who is not involved in the case. “When 92% of participants are being paid while still employed, it just doesn’t look like a retirement plan.”

Mazursky adds that the decision was “very employer-friendly,” noting that the court’s six-factor approach offers companies a clear framework when designing compensation programs and could be useful for future cases.

DeMario Carswell, an ERISA litigator at Miller & Chevalier, who is not involved in the case, says the 4th Circuit’s focus on the fact that only 8% of participants received post‑termination payments highlights that such payments “were the exception rather than the rule.”

The 4th Circuit hears appeals from federal courts in Maryland, North Carolina, South Carolina, Virginia and West Virginia.

Morgan Stanley Case Looms

The ruling comes as similar disputes are considered in other courts, including a high-stakes case involving Morgan Stanley.

In that matter, former financial advisers are seeking class certification in a complaint challenging whether Morgan Stanely’s deferred compensation programs qualify as pension plans under ERISA. The Department of Labor got involved in the case by issuing a 2025 advisory opinion suggesting the plan falls outside ERISA’s definition.

The plaintiffs argue that the company improperly canceled deferred pay, while Morgan Stanley maintains the program’s discretionary bonuses were intended to incentivize performance and retention. The case is being contested in U.S. District Court for the Southern District of New York, which falls under the jurisdiction of the U.S. 2nd Circuit Court of Appeals.

Although circuit courts are not required to use rulings from the other circuits as precedent, attorneys say the 4th Circuit’s reasoning could shape how courts—and arbitrators—evaluate future claims.

“Treating incentive compensation plans as pension plans would have far‑reaching negative effects on how such plans are structured, as well as impose significant administrative burdens and costs that ERISA was not intended to create, for this type of arrangement,” Carswell says.

Carswell also believes the six factors will likely inform future analyses; he expects courts to focus most heavily on plan design, plan language and the structure of payments in determining whether deferred compensation plans fall under ERISA governance.

At the same time, one attorney cautioned that outcomes may hinge on specific facts, particularly employee turnover and when payments are ultimately made.

“If you had 50% or 60% or 70% of employees being paid at or after termination,” Mazursky said, “I wonder if the decision would have been different.”

Motley Rice LLC, Ajamie LLP and Izard, Kindall & Raabe, LLP represent the plaintiffs. Morgan, Lewis & Bockius LLP represent the defendants.