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401(k) Fact |
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A year of employment may be determined as 365 days from your first day on the job or as 1,000 working hours within a 12-month period. |
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Any money you contribute to a salary deferral plan and the earnings those contributions produce always belong to you—though you usually must change jobs or retire to withdraw or move the balance. In contrast, you don't have a right to the money your employer contributes to your account (or the earnings made from those contributions), or makes to any other retirement account for you, until you are fully vested, or have full legal rights to your account. Vesting is determined by time on the job.
Federal regulations set guidelines for vesting, but your employer determines which of the vesting schedules to use. You may be vested though one of three schedules: immediate, graded or cliff.
Immediate vesting means that you automatically have legal right to all the money added to your account.
Cliff vesting grants you the right to 100 percent of your account as soon as you work a certain number of years. That access must be granted within three years of your employment if your employer has made matching contributions to a 401(k) or similar plan. With plans that don’t involve matching contributions, such as defined benefit plans, the cliff vesting requirement is five years.
Graded vesting grants you the right to your account in increments over time. Vesting for matched contributions must occur over two to six years, with 20 percent access by the second year and 100 percent access by the sixth year. In defined benefit and similar plans that don't include matching funds, on the other hand, graded vesting must occur over three to seven years, with a required 20 percent access by the third year of employment.
| Exceptions to the Rules Under certain circumstances, you may become fully vested in the funds held in your plan if: - Your employer ends the company’s plan
- Your employer fires more than 20 percent of the workforce at once
- You’re officially disabled and can no longer work
- You turn 65 while working
In these cases, you have the right to all the money contributed in your name by the employer, and you generally get a check for the amount, which you can roll over.
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