401(k) Vesting Schedules: What are the Rules on Plan Ownership?

Sep 22, 2011
Carol Finch

How Does Vesting Affect Your 401(k) Retirement Savings? - Photo by tanyah

Contributions can be made to a 401(k) plan by the employee & the employer. Your vesting schedule may, however, dictate when you own all your savings. How?

Contributions made to your 401(k) plan don't necessarily belong to you immediately and you may have to wait until you are vested to be given full rights to your balance. How does this affect ownership of your savings and how do vesting schedules work?

Your Own 401(k) Contributions Are Fully Vested

Each and every contribution you make to your plan is 100% vested from the start. You don't have to wait to own these savings and any profits (or indeed losses) that they make. If you quit your job, you won't have to forfeit them. This will not, however, always be the case with employer contributions. In some instances, if you leave a company before you have ticked all the vesting boxes, you will leave behind some or all of the money it contributed on your behalf.

Some Employers Offer Immediate Vesting

In some instances, your employer may also choose, or be obliged, to vest you immediately. Some plans, such as SIMPLE and Safe Harbor options, for example, have rules that dictate this, giving employers no other choice. But, many companies will choose this solution anyway in which case you will own all of your balance from the start rather than being limited to your own contributions until you earn vesting rights.

Cliff Vesting Makes You Wait for Your Money

This option sets a base number of years of service before you earn final access to employer contributions. If you leave before that time, you forfeit them (but not your own). At the moment, under the terms of ERISA (the Employee Retirement Income Security Act), you must be fully vested once you have three years of service. There are exceptions to this rule which may, however, extend the limit up to five years. This might apply, for example, if your employer made matching contributions before 2002.

Graded or Graduated Schedules Give Incremental Ownership

Some plans will vest gradually by percentage over time. Under ERISA rules this basically means that you will earn more rights for every year that you are employed, generally starting from the second year. So, you could have a minimum vesting of:

20% after two years.
40% after three years.
60% after four years.
80% after five years.
100% after six years.

Under these rules this would give you partial vesting if you leave before you reach the 100% limit. So, you would own some employer contributions, but not all.

Again, there are some exceptions to this rule. For example, contributions made by employers before 2007 may run under different guidelines – the percentage breakdown remains the same but the years of service run from three through seven. You can find a full list of schedule tables and criteria on the United States Department of Labor website.

Your Rights to Vesting Credit

Your years of service usually start from the day you are first employed. In some instances employers can, however, defer this date. So, your count may start in the first plan year after your 18th birthday (if you were younger than this when you started your job). This may also apply if you decided not contribute to a plan when you became eligible but then started later.

The cliff and graded schedules outlined here are the legal minimum but some employers do change them slightly. Any changes that are allowed within a vesting system can only be made to decrease the time taken to give you benefits sooner; employers cannot make you wait longer than any schedule that applies to your/their contributions.