While 401(k) plans permit employers to contribute funds to employee accounts, your right to these employer contributions may be subject to vesting depending on your particular plan rules. “Vesting” is the process by which you accrue non-forfeitable rights to employer contributions made to your 401(k) account. In other words, your “vested” balance refers to the portion of the funds you are entitled to.
How do vesting schedules work?
With vesting schedules, you will “see” employer contributions applied to your account balance as they happen, but they don’t actually become yours until you have been with your employer for a specified period of time. Your plan’s vesting schedule is used determine your “vested percentage”.
Note that the following contributions are always 100% vested:
- Your own salary 401(k) contributions
- Rollover contributions from your other accounts
- Safe Harbor contributions from your employer
Cliff or Graded Vesting
Your plan may provide for one of two types of vesting schedules: cliff or graded. For example, a two-year cliff allows you to claim 100% of the accrued employer contributions and all new contributions upon your two-year anniversary. On the other hand, with a two-year graded vesting schedule, you will be entitled to 50% of the accrued contributions after one year of service, and the remaining 50% after the second year.
Additional vesting examples are listed below:
1 Year Cliff Vesting
You will be fully vested in the employer contribution after 1 year of employment, including all subsequent employer contributions, without an additional waiting period.
2 Year Cliff Vesting
You will be fully vested in the employer contribution after 2 year of employment, including all subsequent employer contributions, without an additional waiting period.
3 Year Cliff Vesting
You will be fully vested in the employer contribution after 3 years of employment, including all subsequent employer contributions, without an additional waiting period.
Graded Vesting Examples:
Curious about how much you have vested?
Use your vested percentage from the chart above and multiply by your employer contributions.