Vesting

Vesting can be thought of as ownership of the plan benefit by the participant. By law, all employees must be fully (100%) vested in their own elective 401k plan contributions. 401k vesting typically refers to the participant's ownership of the employer matching contribution. Typically, employers that match employee contributions require participant's to earn full ownership (vest) of these matching contributions by staying with the company for specified periods of time.

Plans may require completion of a specific number of years of service for vesting in other employer or matching contributions. For example, a 401k plan may require that the employee complete 2 years of service for a 20% vested interest in employer contributions and additional years of service for increases in the vested percentage. There are two types of vesting schedules common in 401k plans:

1. With graded vesting, the plan participant owns an increasing portion of the employer contribution each year they are with your company. If the company has a five-year graded vesting schedule, the particpant could be 20 percent vested after one year, 40 percent vested after two years, etc.
2. With cliff vesting, the employer contribution goes from zero to 100 percent vested after a set period of time. So if the vesting requirement is three years and the participant leaves the company after two years, they won't get any of the employer contributions.