| 401k Vesting – How
Vesting Works, 7 Year Graded Vesting Schedule versus the 5 year
Cliff Vesting Schedule & # of Years of Service
(July 26th, 2009)
Vesting refers to the numbers of years of work you must perform
for a company before earning a non-forfeitable right to your 401(k)
retirement money, in case you leave the company or get laid off.
All the money you have contributed to your 401(k) plan + any employer
matched contributions are 100% vested if you can withdraw all of
it upon leaving the company; this is known as withdrawal of accrued
benefits. As a rule of thumb, if you turn 65 years of age while
still working for the same employer, you are 100% vested and can
leave the company and take 100% of your accrued benefits.
Note: You have 100% right to your own contributions
+ investment gains on it, those cannot be forfeited. However, if
your employer makes
401(k) match contributions, then they may
require you to perform a minimum # of years of service before you
can take the money and leave the company. This will make a portion
or all of your accrued benefits vested.
For
instance, if you start with a new company on March 1st, 2009
and the employer matches your 401(k) contribution by $2,500
on June 1st, 2009 and if you were to leave the company by
November 30th, 2009, you may lose the $2500 employer match
because you have worked for less than 1 year. In order to
calculate vesting percentages in correlation with # of years
of service, the Employee Retirement Income Security Act (ERISA)
has put in place a 401(k) vesting schedule that should be
used as a guideline. The 2 most common types of vesting schedules
are the 7 year |
“Graded” vesting schedule and
the 5 year “Cliff” vesting schedule.
i) 7-YEAR "GRADED" VESTING SCHEDULE
| Years of service
completed |
% of Accrued Benefit
that is Vested |
| Less than 3 years |
0% |
| At least 3 but less than 4 years |
240 |
| At least 4 but less than 5 years |
40% |
| At least 5 but less than 6 years |
60% |
| At least 6 but less than 7 years |
80% |
| At least 7 years |
100% |
ii) 5-YEAR "CLIFF" VESTING SCHEDULE
| Years of service
completed |
% of Accrued Benefit
that is Vested |
| Less than 3 years |
0% |
| At least 5 years |
100% |
Your years of service with a company begin as
soon as you start with the company and all your service years must
be taken in to account to determine your vesting eligibility. Of
course, you must be 21 years of age or older to participate in a
company’s 401(k) plan however some companies may allow you
to participate when you are 18, check your plan rules. Also, if
you worked for a company for a number of years but were not participating
in their 401(k) retirement plan, this number of years is still eligible
for determining vesting of accrued benefits.
When you receive your 401(k) benefits statement,
check the number of years of service with the amount or percent
of vested benefit to check for accuracy as there can be errors.
If there are any errors or you are unsure about something, check
and clarify with your plan administrator. The plan administrator
must send you a benefits statement every year, if you do not receive
one, claim for one immediately. In order to keep track of your vesting
eligibility, keep track of the date you started with a company,
the date you began participating in their 401(k) plan as well as
any dates or leave of absence that could impact your vesting.
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