401(k) Vesting Rules

Employer retirement plan contributions aren’t necessarily yours to keep

Employer 401(k) plan contributions are a regularly discussed perk. The internet is littered with articles urging employees to max their match and not leave free dollars on the table. Much less is said about the fine print: The money your employer contributes to your retirement plan might be taken back if you leave your job.

Key Takeaways

  • Companies are free to choose if they want to make staff wait before taking ownership of the money they pay into 401(k)s.
  • Some employers give up ownership of their contributions gradually while others make employees wait a few years and then hand it all over in one hit.
  • The maximum time limits for becoming fully vested are six years with graded vesting and three years with cliff vesting.
  • Employer contributions made to safe harbor 401(k) and SIMPLE 401(k) plans must be fully vested immediately.
  • A 401(k) participant becomes 100% vested at normal retirement age, when meeting a company’s early retirement age provision, or if their retirement plan is fully or partially terminated.

What Is Vesting?

Vesting means ownership. It is a feature of retirement plans that determines when participants gain full possession of employer matching contributions. With a 401(k), an employee pays a percentage of each paycheck directly into an investment account, and the employer may match part or all of that contribution.

Any money you deposit in a 401(k) is yours. Employer contributions are less straightforward. Sometimes they aren’t yours to keep until vesting requirements are met. This can happen gradually as you work more years for the company or all in one hit after a set amount of years of continued employment.

Waiting to get fully vested isn’t an issue if you stick with the same employer. The matching contributions you receive, alongside your own funds, are yours to invest as you please from the minute they are made. The only time this could change is if you leave the job before these contributions are vested. In that case, the funds deposited into your retirement account by your employer may be taken away from you.

Vesting schedules are designed to prevent employees who don’t stick around from taking their employer retirement contributions with them to another job.

Vesting Schedule Rules

Companies are free to choose if they want to make staff wait before taking full possession of the money they pay into a 401(k). Some decline this option and offer immediate vesting, giving employees complete ownership of their employer’s contributions from the moment they are deposited. Others adopt a specific vesting schedule, outlining how much and when an employee is entitled to take any employer contributions with them.

Employers do not have completely free rein to decide the criteria for gaining ownership of matching contributions. The government sets strict guidelines and offers little leeway. Most notably, there is a limit on how long companies can prevent employees from being vested. The Internal Revenue Code (IRC) says that employers are permitted to use one of two vesting schedules: graded vesting or cliff vesting. Each of these schedules comes with its own maximum time frame.

Graded vesting schedule

Graded vesting gradually entitles employees to a bigger percentage of their employer’s retirement contributions as they spend more years at the company. Here’s an example of how it works.

Graded Vesting Schedule Example
Years of Service Percentage Vested
 1  0%
 2  20%
 3  40%
 4  60%
 5  80%
 6  100%
Internal Revenue Service

Employers don’t need to abide by this exact guideline. They can, if they wish, choose to be more generous and speed up the time it takes an employee to become vested—such as, for example, implementing a four-year schedule that has a vesting increase by 25% per year. One thing they can’t play around with is the six-year graded-vesting limit. It is a legal requirement that company contributions become fully vested within that time frame.

Your 401(k) vesting schedule can be found in your plan document, summary plan description, and/or annual benefits statement. If in doubt, ask your human resources manager or 401(k) plan administrator for help. 

Cliff vesting schedule

Cliff vesting takes the opposite approach. Rather than gradually vesting employees, this timetable makes staff wait a few years and then hands over ownership of company contributions all at once. According to the Pension Protection Act of 2006, it is okay to take this path provided that employees aren’t made to wait more than three years.

Cliff Vesting Schedule Example
 Years of Service Percentage Vested 
 1  0%
 2  0%
 3  100%
Internal Revenue Service

Again, employers are free to be more generous than this and make the cliff two years rather than three. The schedule above shows the most severe a company can be.

The maximum a company can prevent employees from becoming fully vested is six years with graded vesting and three years with cliff vesting.

401(k) Contributions That Are Immediately Vested

Some contributions cannot be vested later on and instead must be 100% owned by the plan’s participant as soon as they are made. This rule applies to elective-deferral contributions, which constitute the money deposited from an employee’s paycheck into a retirement plan, and employer contributions made to safe harbor 401(k) and SIMPLE 401(k) plans.

Safe harbor and SIMPLE 401(k)s are simplified variants of the traditional 401(k). Both are not subject to the usual annual compliance tests, helping companies avoid administrative burdens and cut costs, but they do require all employer contributions to be immediately vested.

Events That Can Lead 401(k) Participants to Become 100% Vested

The occurrence of certain events can give employees ownership of their employer’s matching contributions ahead of schedule. The IRC states that a 401(k) participant must be 100% vested:

  • At full retirement age, which varies on a sliding scale between 66 and 67 years old, depending on when you were born
  • When meeting a company’s early retirement age provision (if applicable)
  • In the event that the company retirement plan is fully or partially terminated

There are other circumstances that may prompt an employer to fully vest participants, such as in the case of death or disability. However, this isn’t mandatory and is at the discretion of each individual company.

How Long Until I Am Vested in My 401(k)?

This depends on your company’s plan. Some employers offer immediate vesting, whereas others provide it gradually or all at once after several years of service. To learn about your particular vesting schedule, consult your 401(k) documents or get in contact with your human resources representative or plan administrator.

What Happens to My 401(k) If I’m Not Vested?

Your employer’s contributions will eventually automatically become vested unless you quit your job or are laid off beforehand. In these situations, any unvested money is forfeited and returned to the employer.

Do I Lose My 401(k) Employer Contributions If I Get Fired?

This question has generated a lot of debate. Generally, when an employee is fired or laid off, any unvested money is forfeited. However, mass layoffs may be treated differently.
The IRC says that when a 401(k) plan is partially terminated “all affected participants must be fully vested in all amounts credited to their accounts in the plan.” According to the Internal Revenue Service (IRS), a partial termination is when there is a turnover rate of 20% or more.

The Bottom Line

Being aware of your employer’s vesting schedule and the rules that govern it is fundamental. Today you may love your job. However, there are no guarantees that you’ll still feel the same way in three or six years.

Nobody likes to throw money down the drain, especially if it comes as a surprise. Knowing where you stand makes it easier to make decisions that let you sleep better at night. This could mean hanging on for a few more months to become fully vested before switching jobs or quitting because the benefits of freedom outweigh the lost contributions.

Article Sources
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  1. Internal Revenue Service. "Retirement Topics - Vesting." 

  2. Internal Revenue Service. "401(k) Plans."

  3. Congressional Research Service. "Summary of the Pension Protection Act of 2006," Pages 15-16.

  4. Internal Revenue Service. "Issue Snapshot - Vesting Schedules for Matching Contributions."

  5. So-Fi. "401(k) Vesting: What Does Vested Balance Mean?"

  6. Internal Revenue Service. “401(k) Plan Overview.”

  7. Social Security Administration. “Normal Retirement Age.”

  8. Internal Revenue Service. “Coronavirus-Related Relief for Retirement Plans and IRAs Questions and Answers.”

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