Labor & Employment Law Daily Wrap Up, BENEFITS NEWS—Morgan Stanley deferred incentive compensation program not a pension plan under ERISA, (Sep 10, 2025)

By Patricia K. Ruiz, J.D.

The plan does not make payment of deferred incentive compensation awards contingent on termination of employment or retirement.

In an advisory opinion, the Department of Labor’s Employee Benefits Security Administration (EBSA) concluded that the deferred incentive compensation program of Morgan Stanley Smith Barney LLC (Morgan Stanley) is an exempt bonus program and not an employee pension benefit plan under the Employee Retirement Income Security Act of 1974 (ERISA). The EBSA determined that the payment of a small percentage of awards to financial advisors who terminated employment before the awards' vesting dates due to death, disability, involuntary termination or government service, is not the sort of deferral of income contemplated by ERISA.

Definitions of employee pension benefit plan, bonus program. The requestor asked whether the firm’s deferred incentive compensation program—comprised of the Equity Incentive Compensation Plan (EICP) and Morgan Stanley Compensation Incentive Plan (MSCIP)—(1) is not an “employee pension benefit plan” under section 3(2)(A) of ERISA Title I; and (2) qualifies as an exempt “bonus program” under 29 C.F.R. § 2510.3-2(c). Section 3(2)(A) of ERISA defines the terms “employee benefit pension plan” and “pension plan,” and the EBSA’s regulation at 29 C.F.R. § 2510.3-2(c) clarifies the limits of the term pension plan for purposes of ERISA Title I by describing certain arrangements that will not constitute an employee pension benefit plan within the meaning of ERISA section 3(2). Specifically, for purposes of Title I, the term pension plan “shall not include payments made by an employer to some or all of its employees as bonuses for work performed, unless such payments are systematically deferred to the termination of covered employment or beyond, or so as to provide retirement income to employees.”

Terms of program. The EICP and MSCIP do not, by their express terms, make payment of deferred incentive compensation awards contingent on termination of employment or retirement. Instead, financial advisors earn the right to award payments only upon satisfying the award conditions, which require them to be continuously employed and in good standing through the scheduled vesting date—four or six years of continuous service after the award is granted. Payments are made automatically on the scheduled vesting date, and financial advisors are not permitted to defer the payments to a later date. Awards are canceled if a financial advisor terminates employment or engages in prohibited activities before vesting, except under limited circumstances. These conditions are disclosed annually to the financial advisors.

Deferred compensation. Although the deferred incentive compensation program does not, by its express terms, defer income to termination of employment or beyond or provide retirement income, awards may be paid after the end of employment in limited circumstances where financial advisors are unable to remain employed through the awards' vesting dates due to death, disability, retirement, involuntary termination, or government service. The EBSA considers the allowance of earlier payment upon termination for these reasons as one factor to be considered along with other surrounding circumstances in determining whether the program may be providing retirement income or results in a deferral of income for periods extending to the termination of covered employment or beyond.

Program does not constitute a pension plan. The EBSA found that the materials submitted do not appear to indicate the existence of any surrounding circumstances it previously said would tend to support the finding that an arrangement constitutes a pension plan. Specifically, the EBSA found no evidence suggesting any of the following: (1) an inordinate percentage of the award recipients were at or near retirement age when the benefits were to be paid; (2) distributions were skewed toward the last years of the participants' careers; (3) amounts were distributed with a relatively long payout schedule; (4) individuals not otherwise eligible were selected to receive the award based on being at or near retirement age; (5) participation was limited to individuals ineligible for the firm's retirement plan (which might suggest that the program is meant to replace the firm's retirement plan); or (6) the program was communicated to participants in a manner that caused them to defer income until retirement. Thus, the EBSA found no reason to believe that the deferred incentive compensation program is an employee benefit pension plan under ERISA § 3(2)(A). Because it does not involve the systematic deferral of payments to the termination of covered employment or beyond, the program qualifies as an exempt “bonus program” under 29 C.F.R. § 2510.3-2(c), the EBSA concluded.

Companies: Morgan Stanley Smith Barney LLC

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