recouping contributions to an employee's 401(k) plan

[Guest JD698]

Employer is making 50% matching contribution to employee's 401k plan. After the employee terminates his employment, it is discovered that during the final year of his employment, employee had neglected the employer's work and actively promoted his own business while he was on the employer's payroll. Is there a mechanism for the employer to recoup at least its own matching contributions to the employee's plan?

[Mike Preston]

No. It can't be done.

But, with that said, there is something that is sometimes referred to as the "bad boy" clause. In a nutshell, if the plan document calls for it (repeat: if the plan document calls for it), and if the conditions in the plan are met to define this individual as a "bad boy", then the plan can provide that the vesting schedule is modified to be the slowest allowed by law. However, if the plan already has a vesting schedule that is the slowest allowed by law, there is noting that can be done.

If you really feel this is an issue, then the client should contact an attorney to see about implementing it. Problem is, the cost of deciding how to implement it will no doubt exceed the cost the client would bear to just ignore the issue..... unless there is the potential for a number of these situations to arise. Unlikely, but it is a client decision.

Whether such a bad boy clause could be added after the fact to reduce a terminated participant's vested interest I can't say. My gut tells me no. Then again, I'm not an attorney.

[david rigby]

Would it help (in the future) to have a "last day rule"?