If you have a 401(k) or other retirement plan at work, your employer may add money on your behalf, commonly with matching contributions. For example, the company may provide 50 cents for every $1 you save, up to 6% of your annual salary. Say that you earn $100,000 and sock away $6,000 for the year in your 401(k) — the full 6%. Your employer would contribute an additional $3,000 for the match.
To encourage employees to stay loyal, your plan may include vesting requirements that you must meet to keep the extra money your employer contributes. Your employer’s human resources or finance department should have provided you with a plan document that lists the vesting schedule details. Keep them in mind as you consider the impact of changing jobs.
Vesting ins and outs
Vesting is the process through which you gradually take ownership of a payment or benefit. In this case, it involves becoming the owner of any employer contributions to your workplace retirement account. Retirement plan vesting follows a time-based schedule. If you quit or are fired before a certain period has passed, you forfeit money to your employer. Vesting doesn’t apply to your own contributions to the retirement plan; that’s your money from the start, so your employer can’t take it back.
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There are two approaches for time-based vesting. With a cliff schedule, it’s all or nothing. If you leave your job before working the number of years that your employer requires, you lose all the employer contributions. Once you pass the threshold, you get to keep everything.
Alternatively, your plan may use a graded schedule that unlocks a percentage of your employer’s matching contributions for every month or year you’ve worked, depending on the plan design. If your plan follows a four-year graded schedule, for example, you unlock 25% of the contributions per year before qualifying to keep everything after four years.
Say you receive $1,000 a year from your employer for the retirement plan, and after two years you have $2,000 of employer contributions. You then quit. If your plan uses a three-year cliff, you will forfeit all $2,000 because you haven’t reached the three-year limit yet. If your plan uses a four-year graded schedule, you keep 50% of the employer contributions (two out of four years). In this case, you leave with $1,000.
You need to clear the plan vesting requirements only once. After you reach the required years of employment, all future employer contributions are 100% yours.
Worker protections
Federal rules cap the amount of time that workplace retirement plans can require you to stay with an employer to become fully vested. Three years is the longest a cliff vesting schedule can last; six years is the longest period a plan can use for a graded schedule. Your employer may choose to use shorter limits or even have no vesting at all, but it cannot exceed those limits.
Certain other rules apply, too. For one, you must be fully vested by the time you reach the target retirement age listed in your plan. For instance, if your 401(k) lists a target retirement age of 65 and you join the plan at age 63, you’ll be fully vested within two years, when you turn 65. The regular employee vesting schedule doesn’t apply.
Additionally, if your employer shuts down the retirement plan, you immediately become 100% vested for all past employer contributions. If your employer lays off more than 20% of employees participating in the retirement plan, all affected employees are fully vested (employees who are not laid off are still subject to the standard vesting rules).
And employers cannot use vesting for SEP IRAs or SIMPLE IRAs. These plans have different rules and contribution limits than a 401(k) and are mainly used by small businesses. If you are in one of these plans, any employer contributions become yours immediately.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
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