What is a Bonus for Purposes of ERISA?

An ongoing dispute about a Department of Labor advisory opinion published last September raises a basic but unanswered question under the ERISA: What is a bonus? The answer to this simple question is surprisingly unclear, leaving uncertainty about whether ERISA applies to a variety of common compensation arrangements.

Advisory Opinion 2025-03A expresses the view that two deferred incentive compensation plans for Morgan Stanley financial advisors are, considered together, a bonus program exempt from ERISA under 29 C.F.R. § 2510-2(c). This view directly conflicts with two court opinions in Shafer v. Morgan Stanley (S.D.N.Y. 2023 and 2024), which preceded but are not mentioned in the Advisory Opinion. The Shafer court held that the same plans do not qualify to be treated as a bonus program, but instead are pension plans subject to ERISA because the term “bonus” does not cover commissions that are part of an advisor’s normal compensation.[1] Several former Morgan Stanley financial advisors are suing the Department of Labor to challenge the Advisory Opinion, not only on procedural grounds under the Administrative Procedures Act, but also on the grounds that, as a substantive matter, the Advisory Opinion is arbitrary and capricious.[2]

The question of what constitutes a “bonus” for purposes of determining whether a plan is exempt from ERISA arises from a nuanced difference between the statute and the regulation interpreting the statute. As is well known, pension plans of private employers generally are subject to ERISA, making them subject to minimum vesting, funding, and other requirements unless they are offered only to a select group of management or highly compensated employees. Section 3(2)(A) of ERISA defines the term “pension plan” to mean a plan that either “(i) provides retirement income to employees, or (ii) results in a deferral of income by employees for periods extending to the termination of covered employment or beyond.” As interpreted by several courts, the breadth of “results in” means that if payments to which this provision applies sometimes occur at or after the end of employment, the plan is a pension plan and will generally be subject to ERISA.[3]

However, the regulation at 29 C.F.R. § 2510-2(c) states that the term “pension plan” does not include “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.” This means that if the income deferred under a plan consists of bonuses, the broad “results in” test does not apply, and instead the plan is a pension plan only if the income is “systematically deferred” to or beyond the end of employment. This interpretation puts pressure on the question of whether a payment is or is not a bonus. If an amount payable under a plan is a bonus, the fact that payment under the plan sometimes occurs at or after the end of employment will not be enough to make the plan subject to ERISA, because the regulation states that the plan is exempt from ERISA unless this happens “systematically.”

So: What is a bonus? The Advisory Opinion does not address this question but seems to conclude that the Morgan Stanley plans are not pension plans either because the payments are incentives for continued employment or because plan disclosures have consistently stated that the plan is not a retirement plan subject to ERISA. The Advisory Opinion gives both reasons in a paragraph that ends, “Accordingly, we find the program, by its express terms, not to be an employee pension benefit plan within the meaning of ERISA section 3(2)(A).”[4] It also uses “Accordingly” to introduce a (strikingly tentative) conclusion that the program “appears to be a bonus program” after a paragraph outlining how “the program’s express purposes, design, administration, and the conditions on the award payments support the conclusion that the awards are bonuses” – seemingly because the awards are meant to promote long-term service and good conduct.[5] But the Advisory Opinion does not say what the term “bonus” means. It does refer to prior Advisory Opinions applying the bonus program regulation, but, curiously, each of these Advisory Opinions likewise does not address the meaning of the term “bonus.”[6]

The Shafer court, however, did attempt to address that question. It stated that if a financial advisor’s payment is determined as a fraction of the revenue he or she generates, then it is a “commission” that is earned as a component of the advisor’s normal compensation and not a “bonus.” The court answered the question “what is a bonus?” by citing the definitions in Black’s Law Dictionary (a “premium paid in addition to what is due or expected[,] [especially] a payment by way of division of a business’s profits, given over and above normal compensation”) and Webster’s Third New International Dictionary (“money or an equivalent given in addition to the usual compensation”).[7] These definitions, however, could be seen not as answering but as begging the question in a context – not necessarily this context – where compensation in addition to what is contractually mandated is “expected,” “normal,” and “usual.” Suppose every employee of an employer receives a gratuitous payment at the end of each year. What would make these payments bonuses (or not bonuses) for purposes of ERISA?

The dispute about the substance of the Advisory Opinion turns on, and foregrounds, a long-standing legal uncertainty. Most practitioners would say that a right to payment under a performance-based or incentive compensation program that is designed to be paid out, normally, on an annual basis or periodically during an employee’s period of employment is a “bonus” within the meaning of the regulation, even if the right is contractually guaranteed. But courts may not agree with that view, and the Department of Labor opines on a case-by-case basis, not by reference to an accepted definition. Given the lack of consistent, definitive guidance on what the term “bonus” means, well-informed legal minds may well use different concepts resulting in different outcomes under the regulation. For that reason, it would be helpful to plan sponsors and employees alike if both the Department of Labor and the court hearing the dispute under the Administrative Procedures Act were to give a direct answer to the question of what the term “bonus” means for purposes of ERISA.

If you have questions about whether a deferred incentive plan could be treated as subject to ERISA, please contact a member of Verrill’s Employee Benefits & Executive Compensation Group.

[1] See, e.g., Shafer v. Morgan Stanley, 20 Civ. 11047 (S.D.N.Y. Nov. 21, 2023), 36-39.
[2] Sheresky v. United States (S.D.N.Y., complaint filed Oct. 28, 2025).
[3] See, e.g., Tolbert v. RBC Cap. Markets Corp. (5^th Cir. 2014), Wilson v. Safelite Grp. (6^th Cir. 2019), and Pasternack v. Shrader (2^nd Cir. 2017), all discussed in Shafer.
[4] Adv. Op. at 4.
[5] Adv. Op. at 6.
[6] Adv. Op. at 6 (citing Advisory Opinions 2002-13A, 98-02A, 83-42A, and 82-29A)
[7] Shafer, op. cit. at 36.