Fourth Circuit Clarifies When Incentive Pay Falls Outside ERISA

On April 17, the U.S. Court of Appeals for the Fourth Circuit ruled in Milligan v. Merrill Lynch, Pierce, Fenner & Smith Inc. that the company’s WealthChoice long-term incentive compensation program is not an “employee pension benefit plan” under the Employee Retirement Income Security Act (ERISA) of 1974 (ERISA). SHRM participated in the case as an amicus curiae, along with other employer and industry groups, to help the court understand how modern compensation programs work in practice.

The decision relied in part on regulatory guidance from the Department of Labor and looked at how the program worked in practice, noting that most payments were made to employees who were still working and that the program was meant to encourage performance and long-term retention. In its amicus brief, SHRM argued that ERISA is meant to protect retirement income, not regulate common incentive pay systems used by employers. Additionally, because of the importance of the income it is meant to protect, the ERISA designation rightfully carries signficiant compliance obligations for employers. SHRM noted that long-term incentive plans are widely used across industries and that treating them as retirement plans would add unnecessary complexity and compliance costs without furthering ERISA’s purpose.

This ruling gives employers more clarity when designing incentive compensation programs as it confirmed that, if litigation should arise, the courts will focus on the purpose and overall function of a plan, not just whether payments are delayed or subject to vesting rules. This is imparative when deciding if ERISA applies.