The Fourth Circuit's six-factor test could reshape how employers design incentive plans
The Fourth Circuit just gave employers a new playbook for keeping long-term incentive plans outside federal retirement law.
On April 17, 2026, the Fourth Circuit Court of Appeals ruled that Merrill Lynch's WealthChoice Award program – a long-term incentive plan for top-performing Financial Advisors – is a bonus plan, not a pension plan, and therefore falls outside the reach of the Employee Retirement Income Security Act of 1974.
The case was brought by Kelly Milligan, a former Merrill Lynch Financial Advisor who worked at the firm from 2000 to 2021. During his more than two decades at the firm, Milligan was granted and earned several WealthChoice Awards. He then voluntarily resigned to cofound a competing investment firm. Under the program's terms, his departure canceled all unvested awards. Milligan responded with a putative class action, arguing the program was really an ERISA-covered pension plan and that its forfeiture provisions violated federal vesting and anti-forfeiture rules. The district court in the Western District of North Carolina disagreed and granted summary judgment to Merrill Lynch. The Fourth Circuit affirmed unanimously.
At the center of the dispute is how the WealthChoice program works. Merrill Lynch grants awards annually to Advisors who exceed a minimum production threshold. When an award is granted, a notional account is created – but the account holds no actual funds. Instead, it tracks the value of a benchmark investment selected by the Advisor. The award vests eight years later, and once it does, payment is automatic. Advisors cannot defer the payout. If an Advisor leaves before vesting, the award is generally canceled, though exceptions exist for death, disability, workforce reduction, divestiture, change in control, and retirement.
Milligan argued this structure amounted to a deferral of income extending to the termination of employment or beyond, which would make it a pension plan under ERISA. The court disagreed. It found that the Department of Labor's five-decade-old regulation excluding bonus plans from ERISA's pension definition was validly enacted and still controlling – even after the Supreme Court's 2024 decision in Loper Bright Enterprises v. Raimondo, which tightened the rules on judicial deference to agency regulations.
The court then laid out a non-exhaustive six-factor test for distinguishing bonus plans from pension plans. It considered whether the plan imposed heightened eligibility requirements, whether it was funded with money employees would otherwise receive immediately, whether it used real or phantom investments, whether employees could push payments to termination or beyond, whether it was presented as a retirement vehicle, and whether payouts were linked to firm performance. The WealthChoice program checked every box on the bonus side. The court noted that approximately 92 percent of award payments between 2018 and 2024 went to current employees – not retirees or former staff.
Judge Wilkinson, concurring, warned that the alternative outcome would have been destabilizing. He argued that treating any plan with even a single post-termination payment as an ERISA pension plan would have exposed employers across industries to retroactive liability, daily-accruing penalties, and the burden of restructuring incentive programs they had operated in good faith for years. He also noted the perverse result: employers might simply eliminate post-termination payment exceptions for retirees, disabled workers, and families of deceased employees to avoid ERISA coverage altogether.
The case drew significant outside attention. The Society for Human Resource Management filed an amicus brief cautioning that a reversal would impose major compliance costs on its members and create retroactive liability for past plan administration. The Chamber of Commerce of the United States, the Securities Industry and Financial Markets Association, the Center on Executive Compensation, the American Benefits Council, and the ERISA Industry Committee also weighed in on Merrill Lynch's side.
For HR professionals, the decision offers both clarity and a useful reference point. The six-factor test gives plan designers a practical guide for structuring retention incentive programs that stay on the right side of ERISA. It also reinforces that unfunded, performance-based, retention-driven awards with automatic post-vesting payment do not become pension plans simply because a small number of payments happen to land after employment ends.
