Bad Boy Clauses

[Guest erisafried]

A while back, there was a thread that discussed the limited circumstances in which a plan could enforce a bad boy clause. The IRS pronouncement on the topic--Rev. Rul. 85-31--basically says that, if the plan has a more favorable vesting schedule than the statutory minimum, it can enforce a bad boy clause to reduce the wrongdoing participant's vesting to whatever it would have been under the statutory minimum schedule. The ruling addresses one of the old graded vesting schedules.

The prior thread suggested that the ruling specifically precluded a plan with a graded vesting schedule from switching to a cliff schedule under the bad boy clause. I could find no such statement in the ruling and I was wondering if anyone can shed any light on this.

It would make a difference if a plan had a 7 year graded schedule that was more favorable than the 3-7 year schedule in the Code. If you have someone with less than 5 years of service, if you have to stick to the graded mininum schedule, you can only forfeit, say, 40% of the benefit but if you can switch over to the the cliff schedule, you can zero them out (at least prior to when the EGTRRA 3 year cliff rule kicks in).

Any thoughts on this?