401(k) Vesting Rules (2024)

Table of Contents

What Is Vesting?
Vesting Schedule Rules
401(k) Contributions That Are Immediately Vested
Events That Can Lead 401(k) Participants to Become 100% Vested
Frequently Asked Questions
The Bottom Line

Employer retirement plan contributions aren’t necessarily yours to keep

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Updated August 22, 2022

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Key Takeaways

Companies are free to choose if they want to make staff wait before taking ownership of the money they pay into 401(k)s.
Some employers give up ownership of their contributions gradually while others make employees wait a few years and then hand it all over in one hit.
The maximum time limits for becoming fully vested are six years with graded vesting and three years with cliff vesting.
Employer contributions made to safe harbor 401(k) and SIMPLE 401(k) plans must be fully vested immediately.
A 401(k) participant becomes 100% vested at normal retirement age, when meeting a company’s early retirement age provision, or if their retirement plan is fully or partially terminated.

What Is Vesting?

Vesting means ownership. It is a feature of retirement plans that determines when participants gain full possession of employer matching contributions. With a 401(k), an employee pays a percentage of each paycheck directly into an investment account, and the employer may match part or all of that contribution.

Any money you deposit in a 401(k) is yours. Employer contributions are less straightforward. Sometimes they aren’t yours to keep until vesting requirements are met. This can happen gradually as you work more years for the company or all in one hit after a set amount of years of continued employment.

Waiting to get fully vested isn’t an issue if you stick with the same employer. The matching contributions you receive, alongside your own funds, are yours to invest as you please from the minute they are made. The only time this could change is if you leave the job before these contributions are vested. In that case, the funds deposited into your retirement account by your employer may be taken away from you.

Vesting schedules are designed to prevent employees who don’t stick around from taking their employer retirement contributions with them to another job.

Vesting Schedule Rules

Companies are free to choose if they want to make staff wait before taking full possession of the money they pay into a 401(k). Some decline this option and offer immediate vesting, giving employees complete ownership of their employer’s contributions from the moment they are deposited. Others adopt a specific vesting schedule, outlining how much and when an employee is entitled to take any employer contributions with them.

Employers do not have completely free rein to decide the criteria for gaining ownership of matching contributions. The government sets strict guidelines and offers little leeway. Most notably, there is a limit on how long companies can prevent employees from being vested. The Internal Revenue Code (IRC) says that employers are permitted to use one of two vesting schedules: graded vestingorcliff vesting. Each of these schedules comes with its own maximum time frame.

Graded vesting schedule

Graded vesting gradually entitles employees to a bigger percentage of their employer’s retirement contributions as they spend more years at the company. Here’s an example of how it works.

Graded Vesting Schedule Example
Years of Service	Percentage Vested
1	0%
2	20%
3	40%
4	60%
5	80%
6	100%

Employers don’t need to abide by this exact guideline. They can, if they wish, choose to be more generous and speed up the time it takes an employee to become vested—such as, for example, implementing a four-year schedule that has a vesting increase by 25% per year. One thing they can’t play around with is the six-year graded-vesting limit. It is a legal requirement that company contributions become fully vested within that time frame.

Your 401(k) vesting schedule can be found in your plan document, summary plan description, and/or annual benefits statement. If in doubt, ask your human resources manager or 401(k) plan administrator for help.

Cliff vesting schedule

Cliff vesting takes the opposite approach. Rather than gradually vesting employees, this timetable makes staff wait a few years and then hands over ownership of company contributions all at once. According to the Pension Protection Act of 2006, it is okay to take this path provided that employees aren’t made to wait more than three years.

Cliff Vesting Schedule Example
Years of Service	Percentage Vested
1	0%
2	0%
3	100%

Again, employers are free to be more generous than this and make the cliff two years rather than three. The schedule above shows the most severe a company can be.

The maximum a company can prevent employees from becoming fully vested is six years with graded vesting and three years with cliff vesting.

401(k) Contributions That Are Immediately Vested

Some contributions cannot be vested later on and instead must be 100% owned by the plan’s participant as soon as they are made. This rule applies to elective-deferral contributions, which constitute the money deposited from an employee’s paycheck into a retirement plan, and employer contributions made to safe harbor 401(k) and SIMPLE 401(k) plans.

Safe harbor and SIMPLE 401(k)s are simplified variants of the traditional 401(k). Both are not subject to the usual annual compliance tests, helping companies avoid administrative burdens and cut costs, but they do require all employer contributions to be immediately vested.

Events That Can Lead 401(k) Participants to Become 100% Vested

The occurrence of certain events can give employees ownership of their employer’s matching contributions ahead of schedule. The IRC states that a 401(k) participant must be 100% vested:

At full retirement age, which varies on a sliding scale between 66 and 67 years old, depending on when you were born
When meeting a company’s early retirement age provision (if applicable)
In the event that the company retirement plan is fully or partially terminated

There are other circ*mstances that may prompt an employer to fully vest participants, such as in the case of death or disability. However, this isn’t mandatory and is at the discretion of each individual company.

How Long Until I Am Vested in My 401(k)?

This depends on your company’s plan. Some employers offer immediate vesting, whereas others provide it gradually or all at once after several years of service. To learn about your particular vesting schedule, consult your 401(k) documents or get in contact with your human resources representative or plan administrator.

What Happens to My 401(k) If I’m Not Vested?

Your employer’s contributions will eventually automatically become vested unless you quit your job or are laid off beforehand. In these situations, any unvested money is forfeited and returned to the employer.

Do I Lose My 401(k) Employer Contributions If I Get Fired?

This question has generated a lot of debate. Generally, when an employee is fired or laid off, any unvested money is forfeited. However, mass layoffs may be treated differently.
The IRC says that when a 401(k) plan is partially terminated “all affected participants must be fully vested in all amounts credited to their accounts in the plan.” According to the Internal Revenue Service (IRS), a partial termination is when there is a turnover rate of 20% or more.

The Bottom Line

Being aware of your employer’s vesting schedule and the rules that govern it is fundamental. Today you may love your job. However, there are no guarantees that you’ll still feel the same way in three or six years.

Nobody likes to throw money down the drain, especially if it comes as a surprise. Knowing where you stand makes it easier to make decisions that let you sleep better at night. This could mean hanging on for a few more months to become fully vested before switching jobs or quitting because the benefits of freedom outweigh the lost contributions.

Article Sources

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy.

Internal Revenue Service. "Retirement Topics - Vesting."
Internal Revenue Service. "401(k) Plans."
See Also
Unvested Stock - Everything You Need Know
Congressional Research Service. "Summary of the Pension Protection Act of 2006," Pages 15-16.
Internal Revenue Service. "Issue Snapshot - Vesting Schedules for Matching Contributions."
So-Fi. "401(k) Vesting: What Does Vested Balance Mean?"
Internal Revenue Service. “401(k) Plan Overview.”
Social Security Administration. “Normal Retirement Age.”
Internal Revenue Service. “Coronavirus-Related Relief for Retirement Plans and IRAs Questions and Answers.”

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How 401(k) Matching Works

How to Get the Most Out of Your 401(k) Plan

SIMPLE 401(k) Plan: What It Is, How It Works, FAQ

Benefits of a SIMPLE IRA

5 Questions to Ask About Your Company's 401(k) Plan

Does My Employer’s 401(k) Match Count Toward My Maximum Contribution?

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Related Terms

What Is a 401(k) and How Does It Work?

A 401(k) plan is a tax-advantaged retirement account offered by many employers. There are two basic types—traditional and Roth. Here's how they work.

Vesting: What It Is and How It Works in Retirement and Benefits

Vesting is a legal term common to employer-provided benefits that means to give or earn a right to a present or future payment, asset, or benefit.

Graded Vesting: What it is, How it Works

Graded vesting is a schedule by which employees gain ownership of employer contributions to retirement plans and stock options.

Matching Contribution: What it is, How it Works, FAQs

A matching contribution is a type of contribution an employer chooses to make to their employee’s employer-sponsored retirement plan.

Employee Savings Plan (ESP) Definition, Types, Tax Benefits

An employee savings plan (ESP) is an employer-sponsored tax-deferred account, funded with contributions and typically used to save for retirement.

What Is a Roth 401(k)?

A Roth 401(k) is an employer-sponsored retirement savings account that is funded with post-tax money. Withdrawals in retirement are tax-free.

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As a seasoned expert in retirement planning and 401(k) regulations, I can confidently provide a comprehensive breakdown of the concepts discussed in the article. My expertise is built on a deep understanding of the intricate details surrounding vesting schedules, retirement plan contributions, and the rules governing employer contributions to 401(k) plans.

1. Vesting: Vesting is a critical concept in retirement plans, indicating ownership. Specifically, it determines when participants gain full possession of employer matching contributions. In the context of a 401(k), employees contribute a percentage of their paycheck into an investment account, and the employer may match a portion or the entirety of that contribution. However, the article highlights that employer contributions might not be immediately owned by the employee and could be subject to vesting requirements.

2. Vesting Schedule Rules: The article explains that companies can choose whether to implement immediate vesting or adopt a vesting schedule that outlines when and how much of the employer contributions an employee is entitled to. The government, however, imposes limits on these schedules. The two main types of vesting schedules mentioned are graded vesting and cliff vesting, each with its own maximum time frame (six years for graded vesting and three years for cliff vesting).

Graded Vesting Schedule: This schedule gradually increases the percentage of employer contributions vested based on the years of service.
Cliff Vesting Schedule: In contrast, cliff vesting requires employees to wait a specific number of years before gaining full ownership of employer contributions all at once.

3. 401(k) Contributions That Are Immediately Vested: Certain contributions, such as elective-deferral contributions and employer contributions to safe harbor 401(k) and SIMPLE 401(k) plans, must be immediately vested. Safe harbor and SIMPLE 401(k) plans are simplified variants that do not require waiting periods for vesting.

4. Events Leading to 100% Vesting: The article outlines events that can lead to employees becoming 100% vested in their employer's contributions. This includes reaching full retirement age, meeting a company's early retirement age provision, or in the event of a complete or partial termination of the company's retirement plan.

5. Frequently Asked Questions: The article addresses common questions related to vesting, such as the duration until full vesting, the fate of employer contributions if an employee is not vested, and the impact of termination on vesting. It also touches on the concept of partial termination in the case of mass layoffs.

6. The Bottom Line: The conclusion emphasizes the importance of being aware of an employer's vesting schedule and rules, as unexpected job changes can impact the ownership of employer contributions. The article encourages individuals to understand their specific vesting schedules and make informed decisions regarding their retirement planning.

In summary, my expertise allows me to navigate and elucidate the complex terrain of 401(k) regulations, ensuring a comprehensive understanding of vesting schedules, contribution rules, and the potential impact of various events on 401(k) participants.