When you have a 401(k) that offers an employer match or nonelective contribution, you may not be the only one contributing to your account. In this case, your employer may also make contributions to help boost your retirement savings.
But because these funds are essentially free money from your employer, they may be subject to what’s known as a “vesting schedule” depending on your company’s 401(k) plan.
Vesting refers to the amount of time you must work for your employer before you are entitled to keep the employer contributions. While you will see employer contributions applied to your account balance as they happen, you won’t be eligible to take them until you have been with your employer for the specified period of time.
Types of vesting
100% immediate vesting means you are entitled to all employer contributions right away.
Cliff vesting is where you are eligible to take the full employer contributions after a certain timeframe has passed. For instance, if your company implements two-year cliff vesting, then once you hit your two year work anniversary, you will be 100% entitled to the funds.
With graded vesting, rather than going from 0% to 100% vested after hitting a certain milestone, the percentage you are entitled to increases over a set schedule. For instance, if you have two-year graded vesting, you would receive 50% of the contribution after one year of employment and hit 100% at your two-year mark.
Leaving your company before you reach vesting
If you leave your employer before you are 100% vested, then you will forfeit all or a portion of the employer contribution amounts, depending on your company’s vesting schedule.
Please note, you are always 100% vested and entitled to your own salary contributions, any rollover balances from your other retirement accounts, and any traditional safe harbor contributions.
To find your company’s vesting schedule, access the Plan Details page of your Guideline dashboard.