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  • Common Files

    What is 401k Vesting and How Does it Work?

    Vesting is a type of security feature for companies to retain talented and hardworking employees for the longer term. 401k Vesting is the amount of time you MUST work for a company to fully accrue your 401k savings and not forfeit them (if you quit your job prematurely). Thus, when you are "fully vested", this means you have accrued your 401k retirement savings fully and can rollover into an IRA incase you quit working for the company.

    If you are the only one making contributions towards a 401k plan (and not your employer together), then you have full 100% vesting. However if your employer matches your 401k contributions by say 50% (meaning if you contribute $10000 a year into your 401k, your employer would therefore contribute 50% of $10,000 = $5000), then you might be required to perform a minimum certain # of years of work for your employer before you have 100% vesting of 401k retirement funds.

    Here is a 401k Vesting Schedule set by the Employee Retirement Income Security Act (ERISA) as a minimum guideline both for 401k contributors and employers.

    401k Vesting Guideline Schedule 1 set by ERISA
    Years of Work Vested Percentage of Accrued Benefits Vested
    Less than 3 0%
    Atleast 3, but not >4 20%
    Atleast 4, but not >5 40%
    Atleast 5, but not >6 60%
    Atleast 6, but not >7 80%
    Atleast 7 100%
    401k Vesting Guideline Schedule 2 set by ERISA
    Years of Work Vested Percentage of Accrued Benefits Vested
    Less than 3 0%
    Minimum 5 100%

    The # of years you have vested starts counting even before you start contributing towards a 401k plan. Thus for example if you have been working for your company for 7 years, but you just starting contributing towards a 401k plan 2 years ago, then 100% of your accrued benefits is vested (because you have worked for 7 full years - check the 2 schedules above).

    Thus, if you join a company that offers 401k plans, be sure to note down some important reminders:

    - The day you started working for the company (hire date)
    - The date you started contributing towards a 401k plan
    - Any absence or leave that will be deducted of your # of years vested

    Also note that if your employer changes the vesting schedule after you've accumulated 3 years of vested work for the company, you are NOT required to follow the new vesting schedules - you can stick to the old one, it's your right!



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