In simple terms, vesting means “ownership”. To be vested in your 401k plan means that you have full ownership rights to the assets in your 401k account. If you terminate employment, those assets are yours.
Many 401k plans include contributions from both you (employee) and your company (employer).
Employee contributions are immediately 100% vested under IRS rules – i.e. the money that an employee has put aside through salary deferrals cannot be forfeited. When an employee leaves employment, he/she is entitled to those deferrals, plus any investment gains (or minus losses) on their deferrals.
You do not necessarily have an immediate right to contributions made by your employer, however.
In traditional 401(k) plans, the employer can design your plan so that employer contributions become vested over time, according to a vesting schedule1
Employers have a choice of 2 different vesting schedules for employer matching 401(k) contributions. Your employer may use a schedule in which employees are 100 percent vested in employer contribution after 3 years of service, called cliff vesting. Under graduated vesting, an employee must be at least 20 percent vested after 2 years, 40 percent after 3 years, 60 percent after 4 years, 80 percent after 5 years, and 100 percent after 6 years.
Check with you plan sponsor to determine the type of vesting schedule your plan follows and to determine whether you are fully- or partially-vested in your 401k plan.
401k Graduated Vesting Example
401k Cliff Vesting Example
|Less Than 3||0%|
|At Least 3 Years||100%|
- In SIMPLE 401(k) plans and safe harbor 401(k) plans, all required employer contributions are always 100 percent vested. [↩]