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February 18, 2009

Bad-Boy Clause



A provision in a qualified plan, under which a participant would lose – usually unvested– benefits, if the participant engages in dishonest activity such as fraud, that involves the plan assets.

Referring Cite

Temp. Treas. Reg. §1.411(a)-4T, Revenue Ruling 85-31

Additional Helpful Information

  • Bad-boy clauses are not always enforceable.
  • The plan must usually define the circumstances under which benefits would be forfeited, before the circumstances occur. Otherwise, it may not be enforceable.
  • Bad-boy clauses cannot include time restrictions on vesting that goes beyond the vesting schedule. For instance, if the clause is non-competing in nature, it cannot provide that if the participant leaves to work for a competitor after the vesting period expires, the benefits would be forfeited.

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