By Ian Berger, JD
IRA Analyst
Thinking about leaving your job? Make sure you understand the vesting schedule that applies to your retirement plan. It may pay to stick it out a little longer to become more “vested” in your plan. Otherwise, you may lose out on valuable benefits.
What does it mean to be “vested”? Vesting tells you how much of your plan benefit you actually own and cannot be taken away from you:
- If you’re fully vested, you’re entitled to 100% of your benefit.
- If you’re partially vested, you only get a portion of your benefit.
- If you’re 0% vested, you receive no benefit at all.
In the case of a partially-vested or 0%-vested benefit, the unvested portion of your benefit will be forfeited and used by your employer to make future company contributions or pay administrative expenses.
You receive vesting credit based on your service with your employer. Most plans award you with a year of vesting service for each 12-month period that you work at least 1,000 hours. Other plans measure vesting service based on the total period of your employment from date of hire to date of separation. (Special rules may apply if you were previously a part-time employee.) Check the plan’s written summary or speak with the plan administrator or HR for more details.
In a defined contribution plan like a 401(k), 403(b) or 457(b), your own contributions (whether pre-tax deferrals, Roth contributions, or non-Roth after-tax contributions) and associated earnings are immediately 100% vested. However, employer matching contributions (or other employer contributions) and associated earnings may either be immediately 100% vested or subject to a vesting schedule.
If your plan uses a vesting schedule, it must be either “cliff vesting” or “graded vesting.” If cliff vesting is used, the schedule must be at least as favorable as the following:
Years of Service Cliff Vesting
1 0%
2 0
3 + 100
If graded vesting is used, the schedule must be at least as favorable as the following:
Years of Service Graded Vesting
1 0%
2 20
3 40
4 60
5 80
6 + 100
Example: Selina participates in a 401(k) plan with a 6-year graded vesting schedule for employer matching contributions. She leaves her job after three years of service with $40,000 in her pre-tax deferral account and $8,000 in her match account. Selina can directly roll over $43,200. That represents 100% of her deferral account ($40,000) and 40% of her match account ($3,200). The unvested part of her match account ($4,800) will be forfeited.
Most defined benefit pension plans use a 5-year cliff vesting schedule where benefits become 100% vested after five years of service.
By law, your benefit under any company plan must become 100% vested, regardless of years of service, when you reach the plan’s “normal retirement age” (typically age 65) or when the plan terminates. Many plans also provide for 100% vesting if you die or become disabled.
Your IRAs, including SEP or SIMPLE IRAs, are not subject to vesting rules. You can receive the full value of your IRA accounts at all times.
If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.
https://irahelp.com/how-the-vesting-rules-work-for-company-retirement-plans/