What Is 401(k) Vesting?

Vesting refers to the amount of time it takes for an employee to take full ownership of an employer 401(k) contribution. While the funds that an employee contributes to a 401(k) are 100% vested, an employer contribution may not be fully available to an employee until the vesting requirements are satisfied.

Vesting can happen at a gradual pace or all at once after the employee has worked a certain number of years at a company.

If an employee stays with a company until retirement, they have no reason to worry about vesting requirements. However, if they decide to leave the company, a portion or all unvested employer contributions may be forfeited back into the plan.

What Are Vesting Schedules?

Some companies offer immediate vesting, meaning the employee owns their employer contributions right away. However, other companies may choose to delay employee vesting for a period of time.

If a company chooses the latter, a vesting schedule determines how long it will take for employer contributions to be fully vested.

Each company is different and may choose between two common types of vesting schedules. Note that for an employee to complete a year of service, they must work at least 1,000 hours during that year.

Graded Vesting

Graded vesting allows the employee to take ownership of at least 20% of funds after two years of employment. This amount increases by an additional minimum of 20% each year.

For example, after two years, an employee may obtain a minimum of 20% of the employer match, followed by an additional 20% each year until the funds are 100% vested. The employee must be fully vested within six years.

Cliff Vesting

In a cliff vesting schedule, employees take ownership of 100% of the employer match after a period of up to three years.

Vesting Schedule Guidelines

Employers need to follow strict government guidelines. According to the Internal Revenue Code, employers must follow one of the two vesting schedules and each one has a maximum time frame.

If you don’t know your company’s vesting process, you can find this information in the Plan Highlights document located in the About My Plan section of your participant website.

What Are the Benefits of a Vesting Schedule?

Employers may opt to delay vesting to support employee retention. For instance, an employee may consider leaving a company but delay their departure until after they are fully vested in their 401(k). Knowing that an employer will match the employee’s contribution may also incentivize a current employee to contribute to their 401(k).

What Are the Downfalls of Vesting?

One of the pitfalls of vesting schedules is that employees may forfeit a portion of their employer contributions if they leave prior to becoming fully vested. In some cases, vesting schedules may cause an employee to stay with a company they’ve outgrown to reap the reward of fully vested funds. Eventually, an employee may have to weigh this waiting period against their career goals.

What Happens if an Employee Leaves Before Their Funds Are 100% Vested?

An employee may have weighed their options and ultimately decided to join a new company. However, if they transition to a new employer, money that was not fully vested into their 401(k) account is forfeited back to the original plan.

If an employee is terminated or laid off, they forfeit all unvested funds. However, according to the Internal Revenue Code, when a 401(k) plan experiences a partial termination (more than 20% of plan participants are laid off), all the participants must become fully vested.

Understanding your company’s vesting schedule can be key to making career decisions. To see your recent contributions and employee match balance, log in to your ePlan Services account and view your participant dashboard.

This content is for educational purposes only, is not intended to provide specific legal or financial advice and should not be used as a substitute for the legal advice of a qualified attorney or financial professional. The information may not reflect the most current legal developments, may be changed without notice, and is not guaranteed to be complete, correct, or up to date.