When you make contributions to your 401(k) plan, the money becomes yours automatically. If your employer makes contributions to your plan, however, the money does not become yours until you are vested. The 401(k) vesting can happen either immediately, gradually, or after working in the company for a given number of years depending on your company’s 401(k) vesting policy. To claim your employer’s full match to the plan, you will need to be fully vested.
Here is everything you need to know about 401(k) vesting schedules, how to know if you are fully vested, and what happens to your unvested balance when you quit your job.
What does it mean to be vested in a 401(k) plan
Being vested in a 401(k) plan means you have partial or full ownership of your company’s match and stock options to the plan. Some companies have immediate 401(k) vesting while others have different vesting structures where you are awarded a percentage of the employer match to the plan gradually. When you are fully vested, you will have 100% access to your funds and the employer cannot forfeit funds in your 401(k) plan when you leave your job.
For example, if your company has a 6-year 401(k) vesting policy, you will need to work in the company for 6 years before you can own 100% of your employer’s match to the plan. Depending on your company’s vesting schedules, you might have ownership of your company’s match based on your years of service.
Keep reading for more details on how 401(k) vesting schedules work and different ways to know how much of your 401(k) is vested.
How does 401(k) vesting work?
Retirement plans such as 401(k) and 403(b) are some of the biggest profit-sharing options many companies offer as part of employee benefits packages. To attract great talent, companies also match employees’ contributions to their 401(k) plans. As an employee, your contribution to the plan is 100% vested the moment the money is deposited in your account. At the end of the day, those contributions came from your paycheck through payroll deduction.
If your employer matches your contributions, however, you might not claim ownership of your employer match until you have worked in the company for a given number of years. After you are fully vested, the company’s match to the plan becomes yours and you can take it with you if you quit your job or retire.
While some companies have immediate vesting policies, others have different vesting schedules where you get vested after several years of service or get vested gradually.
How do 401(k) vesting schedules work?
The term “vested” in a 401(k) retirement plan refers to “ownership”. When your company matches your contributions, you own a portion of the employer match or 100% of it based on your company’s vesting schedules. If you are immediately 100% vested, you own 100% of employer match contributions to your plan and the company cannot forfeit it when you leave your job.
Your contributions to the plan are fully vested right away. Your company’s contributions might take several years before you can claim them. Most companies allow you to own a small percentage of the match contributions at an incremental rate over time.
That is the longer you work in the company, the more percentage of the company’s match will be yours. It can take several years to be fully vested based on the plan policies, according to the Internal Revenue Service(IRS). Before those years have elapsed, you might have owned a percentage of your employer’s match depending on the vesting schedule your employer uses.
Example of vesting schedule
For example, your company might have the following graded vesting schedules.
25% vested after 1 year of service
50% vested after 2 years of service
75% vested after 3 years of service
and 100% vested after 4 years.
With this vesting schedule, you can claim your company’s match 100% only after you have worked in the company for 4 years. If you leave the company after 3 years, for example, you will have been vested 75%. This means you will lose 25% of your company’s match to the plan.
401(k) vesting schedules differ from one employer to another. Some employers have an immediate vesting policy. This means your employer match contributions are 100% vested right away and you can take the money with you any time you quit the job. Other employers use various types of vesting schedules which I will describe in the next few paragraphs.
Different types of vesting schedules
If you currently have 401(k) benefits and your employer matches your contributions, your employer more likely uses one of the following vesting schedules.
- Time-based vesting. Time-based 401(k) vesting schedules usually follow specific schedules based on cliff time where the first percentage of your employer match is vested after the cliff. After this period, the employer matches are vested at different time intervals such as quarterly or yearly.
- Milestone vesting. This type of 401(k) vesting schedule refers to a vesting method where you earn a percentage of your employer match after achieving a certain milestone. For example, if you are in marketing, you could be given a percentage of the company’s match after you have reached a particular marketing goal.
- Immediate vesting. For immediate vesting, there is no waiting period before you can own 100% of your employer’s match. All of your employer’s matches are yours to keep when you leave your job without forfeiting a part of it.
- Graded vesting. With graded vesting, you own a small percentage of your employer match overtime. Usually, the ownership is offered in increments of 20% per year until you are fully vested after six years.
- Cliff vesting. With cliff vesting, you don’t get vested until you have worked in the company for a given number of months or years also known as a cliff. After the cliff, all your employer’s matches become yours to keep and you can take them with you once you leave your job.
How do I know if I am fully vested in my 401(k)?
Being fully vested in your 401(k) means all your employer match is yours to keep and you take it with you if you leave your job. The actual vesting schedule and amount you’re vested in may differ based on your company’s policies.
Here are some steps to find out if you’re fully vested in your 401(k) and how much of your employer’s match is vested.
- Check your vesting schedule. Your company should provide a vesting schedule that outlines how much of the employer contribution you’re entitled to based on the years of service.
- Ask your human resources department. Your HR department can provide accurate information about your vesting status and the company’s vesting policies.
- Review your 401(k) statements. Your 401(k) statements will disclose your vesting percentage. Regularly review these statements to keep track of your vested amount.
- Speak with your plan administrator. Your 401(k) plan administrator can provide you with specific details about your plan and your vested percentage.
- Check your 401(k) account online. Many companies and plan administrators offer online access to your 401(k) information which also includes details about your vesting status.
What happens to unvested 401(k) when you quit?
When you quit your job, what happens to your unvested 401(k) balance largely depends on your company’s vesting schedule. Here is what you should expect to happen to your unvested 401(k) funds when you leave your job.
If your company uses a cliff vesting schedule, meaning you are not fully vested until a specific point in time, you would forfeit all employer contributions if you quit before that time.
On the other hand, if your company operates on a graded vesting schedule, the vesting will occur gradually over an extended period such as 20% vested after two years, 40% after three, and so on. If you quit before becoming fully vested, you would keep the percentage of employer contributions corresponding to your vested status at that time.
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How long does it take to get vested in 401(k)?
Regardless of your employer’s vesting schedule, all of your contributions to your 401(k) are always 100% vested immediately. Only the employer-contributed funds may be subject to a vesting schedule.
The length of time it takes to get fully vested in your 401(k) plan can vary depending on the vesting schedule set by your employer. Some employers may offer immediate vesting, while others may use a graded vesting schedule that gradually increases your vested percentage over several years, typically 2-6 years.
Additionally, some employers may use a cliff vesting schedule where you become fully vested after a certain number of years, typically 3 years. To know the specific time you are fully vested in your 401(k) plan, review your 401(k) plan documents or consult with your plan administrator to understand the specific vesting schedule applicable to your plan.
Can you lose vested money?
Yes, you can lose vested money. Vested money refers to funds, stock, options, or assets that have been legally given to you, often as a part of your compensation. However, there are circumstances where even vested money can be lost. For example, if you invested your funds in a fund that failed, the value of that investment may depreciate significantly, leading to a loss of your funds.
Additionally, if inflation rates outpace the growth of the vested money, its purchasing power can be eroded.
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What happens at the end of a vesting period?
At the end of a vesting period, you will have full ownership of the benefits such as 401(k) match or stock options provided by your employer. Regardless of your employer’s vesting policy, all the benefits in the account become yours after you are 100% vested and your employer cannot forfeit a part of it.
What does it mean to be vested after 5 years?
Companies use different vesting schedules within the retirement plans they offer to employees. Typically, it takes between 2 to 7 years to be fully vested which is the time you can have access to all of your employer match to the account.
Being vested after 5 years means that your company has a 5 years vesting policy. This means that you will have access to all your amount of benefits including employer match after working in the company for years. Not all companies have the same vesting schedule, some can be immediate while others may require a longer commitment.
