Vesting (401(k))

A vesting schedule determines when employer contributions to a 401(k) plan become your property. Your own contributions are always 100% vested immediately, but employer match and contributions often vest gradually over time. If you leave before becoming fully vested, you forfeit the unvested portion.

How vesting works

Employer contributions to your 401(k) vest according to a schedule that the employer sets (subject to IRS rules limiting vesting periods). Your own employee deferrals are always 100% yours immediately; only employer contributions are subject to vesting.

Example: your employer offers a 100% match of the first 3% of salary on a 3-year cliff vesting schedule.

• Year 1: You contribute $2,000, employer matches $2,000. You own your $2,000; the employer’s $2,000 is not vested yet. If you leave in year 1, you take your $2,000 and lose the $2,000 match.
• Year 3: You have worked three years. Your balance now includes your contributions ($6,000) and the employer match ($6,000), and all of it is vested. If you leave after year 3, you take all $12,000.

Cliff vesting vs. graded vesting

Cliff vesting. Common structure: 0% vested until a specific year (usually 3), then 100% vested at that point. Once you hit the mark, you own all of it. It is an all-or-nothing approach. Vesting happens on one date; after that, you own everything.

Example: 3-year cliff means 0% at year 2, 100% at year 3.

Graded vesting. Common structure: vesting increases gradually over time (usually 5 years). You own an increasing percentage each year.

Example: 5-year graded at 20% per year:

• Year 1: 20%
• Year 2: 40%
• Year 3: 60%
• Year 4: 80%
• Year 5: 100%

If you leave after 3 years, you own 60% of the employer contributions; 40% is forfeited.

Impact on job decisions

Vesting significantly affects the value of a job. A $50,000 salary with a 6% match on a 1-year vesting schedule is materially more valuable than the same salary with a 6% match on a 5-year vesting schedule.

If you are considering leaving a job:

1. Check your vesting schedule. Often in your plan summary or available from HR.
2. Calculate when you vest. If you are close to full vesting, staying a few extra months could be worth thousands.
3. Compare to the new job’s match. The value lost by forfeiting unvested match should be factored into salary negotiations.

Example: you are 80% vested in your current 401(k), with $50,000 in unvested employer match. That means $40,000 is unvested. If you leave in one month (and would have vested 100% in three months), you lose $10,000. The new job would need to offer material additional benefits to offset this.

Vesting does not change on termination

If you are fired or laid off, your vesting schedule does not accelerate or reverse (absent a specific plan provision or severance agreement). You are vested in what you have earned based on time served.

However, some plans offer accelerated vesting as part of severance agreements in layoffs.

Vesting and equity awards

If your employer offers restricted stock units (RSUs) or stock options, those have separate vesting schedules (not 401(k) vesting). RSU vesting is typically 4 years with a 1-year cliff, but this is independent of 401(k) vesting.

Changing employers and rolling over

When you leave a job, you have several options for the vested balance:

1. Leave it in the old employer’s plan. The balance stays and continues to grow; you can withdraw at retirement age.
2. Roll to a new employer’s 401(k). If the new employer plan accepts rollovers.
3. Roll to an IRA. You can roll to a traditional IRA, gaining more investment options.

In all cases, you keep only the vested balance. The unvested portion is forfeited and typically returned to the employer (as a “forfeiture pool” that can be reallocated to remaining employees or used for plan administration).

See also