If you’re a TV reality show fan, you’ll recognize the quoted part of the headline as the opening from Bad Boys, the theme from Fox’s long-running show COPS, by Inner Circle, the Jamaican raggae group.
The second part of the headline can be viewed as life imitating art. As the economy tanks, crime rises. Marc Tracy over at my other blog home, Bizbox – a special promotion by OPEN from American Express on Slate, writes about that in Sniffing Out Employee Fraud.
But it’s not just white collar crime. Just this week, the CFO of a client called me about a terminated employee caught shopping at the company warehouse using a ten-fingered midnight discount. The terminated employee has now applied for a profit sharing plan distribution. He asked me whether the company could impose a forfeiture of his vested account balance.
In other words – and the focus of this post – may a nonforfeitable benefit ever be forfeited?
Back in the day (pre-ERISA), retirement plans did have “bad boy clauses” in which forfeitures were imposed because of employee dishonesty or a violation of a promise not to compete.
But now in the modern era, bad boy clauses are generally not permitted. Generally, I say, because the Pension Answer Book, one of our “go-to” resources cites a number of court cases and Internal Revenue Service regulations that vested benefits in excess of the benefits required to be nonforfeitable under the ERISA alternative vesting schedules may be forfeited because of an employee’s misconduct or dishonesty
So paraphrasing one of the Pension Answer Book’s examples, suppose an employer’s plan had a five-year graded vesting provision. The plan provides for forfeiture of benefits if an employee with less than three years of service terminates employment and works for a competitor or is dishonest. Permissible because the plan could have had three-year cliff vesting.
The Pension Answer Book points out that the qualified plan must provide the specific criteria for application of this bad boy clause, and it can not be discriminatory in operation.
Whatever. A bad boy clause isn’t even going to be an option for most employers today since most employers use pre-approved plan documents, e.g., prototypes and volume submitter, which won’t have such clause.
And to use an individually designed plan with such clause would be many times more expensive for both preparation of the document and the IRS determination letter process. And add additional cost if protracted discussions with the IRS is required.