Bonus Plan or Deferred Compensation? DOL Reaffirms Bonus Plan Exception to ERISA

Bonus Plans Non-ERISA Status in Question

On September 9, 2025, the DOL issued Advisory Opinion 2025-03A which concluded that the bonus program in which the former employees participated was not a pension plan designed to provide retirement income (as contemplated by ERISA Section 3(2)(A)) but instead a “bonus program” under 29 C.F.R. § 25120.3-2(c) and, consequently, that the programs were also not required to satisfy ERISA’s reporting, claims, vesting timing and funding provisions. 

It is common in certain industries for high-earning employees to enter into long-term, unfunded compensatory arrangements providing participants the election to choose to receive a portion of vested incentive awards currently or to defer amounts for payment at subsequent specified dates, subject to continued employment through the applicable payment date. Typically, such arrangements are unfunded and provide that unpaid amounts as of the date of the employee’s voluntary separation from service are forfeited. Employers have long viewed these programs as incentive plans (rather than pension plans), and thus not subject to ERISA’s minimum standards for participation, vesting, benefit accrual and funding and, as bonus or incentive plans (rather than pension plans), also not required to meet the exemptions from ERISA available to “top hat” plans described under Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA.  See, e.g.,:https://www.boutwellfay.com/post/top-hat-plan-basics. 

In recent years, this structure has been challenged by the former Morgan Stanley and Merrill Lynch financial advisors who argue that the benefits which they receive under these top-hat plans are pension benefits governed by ERISA, that their deferred accounts should be fully vested after three years of service, and that they should be able to sue as a class in court for the forfeited amounts without regard for the arbitration provisions in the program documentation. The latest development in the dispute could have broad ramifications for companies with similar compensatory schemes for typically high earning employees. There are dozens of pending arbitrations under just the Morgan Stanley and Merrill Lynch plans, asking for clear and consistent guidance in answering this question. It appears that, for now, the prevailing view will remain in place, despite the challenge. 

Key aspects of the DOL’s reasoning include: (i) the purpose of the program (to reward financial advisors for their long-term tenure and “to incentivize good behaviors”), (ii) the design and administration of the program, (iii) the unfunded, unsecured and nonguaranteed nature of the awards, (iv) the lack of accruals under the program and (v) the fact that participants are annually notified that the express purposes and conditions of the program are that of an incentive program and not a retirement plan subject to ERISA. The financial advisors allege that the Advisory Opinion was improperly issued, wrongly argued and enacted due to pressure from Morgan Stanley’s attorneys rather than analysis of precedent and the laws and regulations promulgated under ERISA. 

If these arrangements were to be deemed subject to ERISA, then unless they qualify as top hat plans (and these arrangements often extend to a group of employees beyond a select group of top management), among other things, (i) benefits under the arrangements would be required to fully vest after three years of service as pension benefits under ERISA Section 3(2)(A), (ii) as pension benefits, the amounts under similar programs would have to be funded by establishing a trust at the time benefits are earned, and (iii) upon the vesting date, the value of awards under the program would be subject to immediate taxation. Each of these consequences would necessitate review and likely restructuring of many compensation arrangements.  

If you have any questions about how the recent DOL opinion may affect your company’s compensation programs, please contact your Boutwell Fay attorney.

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