Vesting Schedules – Everything You Need to Know

Vesting is a retirement plan feature in which you gain ownership over your employer’s contributions after a certain number of years of employment. Essentially, vesting is a way for employers to incentivize employees to stick around.

How quickly and how much employer contributions vest can be very different from plan to plan, and is determined by a “vesting schedule”.

Below are answers to some of the most common questions we get on vesting schedules.

How Do I Know if My Plan Has a Vesting Schedule and What My Vesting Percentage Is?

If your plan has a vesting schedule, you can find it in the Summary Plan Description (SPD), which is a document your employer is required to send you within 120 days of your entry into the plan. 

Your quarterly participant statements will also show your vested percentage for each account type.  If you cannot determine your vested percentage this way, check with your plan administrator (a point of contact will be provided in your SPD).

As will be discussed below, contributions you make to the plan, such as salary deferrals to your 401(k) plan or rollover contributions, are always fully vested.

What Vesting Schedules are Possible?

The Internal Revenue Code (IRC) provides two acceptable vesting schedules 401(k) and profit sharing plans: three-year cliff and two- to six-year graded.  Under a three-year cliff vesting schedule, participants are 100% vested in the employer contributions when they are credited with three years of vesting service, but are 0% vested at all prior points.  Under two- to six-year graded vesting, participants are increasingly vested in the employer contributions with each passing year. The below chart shows the vesting percentages for both possible schedules.

Three-Year Cliff
Years of Service Vested Percentage
0 0%
1 0%
2 0%
3 100%
Two-to-Six-Year Graded
Years of Service Vested Percentage
0 0%
1 0%
2 20%
3 40%
4 60%
5 80%
6 100%

Employers can adopt vesting schedules more favorable to their employees.  For example, an employer could have participants fully vest after two years (two-year cliff) or have participants increase their vested percentage by 25% per year for four years (4-year graded).  Both of these schedules are allowed, because participants vest faster under these schedules than they do under the IRC’s schedules above.

There is a special safe harbor 401(k) plan that provides for automatic enrollment, called a Qualified Automatic Contribution Arrangement (QACA). Employer contributions under a QACA may have a two-year vesting schedule.

What Events Will Cause Me to Become 100% Vested?

There are 3 major events that will automatically cause you to become 100% vested regardless of years of service:

  1. You terminate your company retirement plan
  2. A participant attains Normal Retirement Age, as defined in the plan document. Normal Retirement Age cannot be greater than the later of age 65 of the 5th anniversary of when the participant entered the plan
  3. If your plan has one, a participant meeting your Early Retirement Age provision would trigger them to be fully vested

Employers often choose to fully vest participants in cases of death or disability, but they are not required to do so.

Are There Any Contributions That Cannot be Subject to Vesting?

Yes. Employer contributions made as a traditional safe harbor contribution – whether nonelective or matching – must always be immediately vested 100%.  Employee deferrals, Roth 401(k) contributions, rollover contributions, and employee after-tax contributions must also be 100% vested as soon as they’re made. 

Only non-safe harbor employer contributions can be subject to a vesting schedule.

What Happens if I Leave My Employer and I Am Not Fully Vested?

If you terminate employment, and are only partially vested, the nonvested portion of your account is lost (or “forfeited”).  For example, if you have $1,000 in your account that is subject to vesting and you are only 60% vested at the time you terminate employment, you are only entitled to $600.  The remaining $400 is forfeited.