Vesting is the process by which a participating employee’s benefits become non-forfeitable. A vested balance represents the benefits a saver has earned the right to keep should they leave employment at any time. Vesting is one way to use your plan as an employee retention tool since you can create a schedule that rewards long-term employment with your company.
Employee contributions and rollovers into the plan are always fully vested, but employer contributions like matching and profit-sharing contributions may be subject to a vesting schedule.
Note: Starter 401(k)s are a specific type of 401(k) that Congress introduced in the SECURE Act 2.0 of 2022. Though similar to traditional 401(k)s, Starter 401(k)s do not permit employer contributions. Therefore, all contributions made to Starter 401(k) accounts, since they are employee contributions, are immediately vested.
What Is a Vesting Schedule?
The vesting schedules are based on the number of years of vesting service an employee is credited. Note that as with eligibility, service with all related companies (dates of hire, hours of service, as applicable) must be reported to us to ensure vesting is accurately calculated on an ongoing basis.
At this time, only one vesting schedule may be elected across employer contribution types.
- 100% immediate
- 2-Year Cliff: 0% vested until credited with 2 years of service, then 100% vested
- 4-Year Graded: 25% each year starting after 1 year of service, then 100% at 4 years
- 6-Year Graded: 20% each year starting after 2 years of service, then 100% at 6 years
- 3-Year Cliff: 0% vested until credited with 3 years of service, then 100% vested
- As needed, a schedule that aligns with a prior plan document
Vesting Recognition Options
Below are standard vesting recognition options supported by our bundled offering:
- Elapsed Time: An employee is credited with a year of vesting service on each anniversary of hire if employed. Credit is generally recognized as if employed continuously if an employee terminates service and is subsequently rehired within 12 months.
- Hour-Based: Service is based on hours worked each plan year. An employee does not have to be employed on the last day of the year for service to be counted; a year of vesting service is credited as soon as an employee is recognized with 1,000 hours in a year.
Vesting Exceptions
If an actively employed individual passes away or becomes disabled, their employer contributions become immediately vested. Note that by statute, employees must be made 100% vested upon attainment of the plan’s Normal Retirement Age (NRA).
Vesting Exclusions
Recognition of service for vesting may be restricted to only such service after an employee turns age 18 and/or after the original effective date of the plan. By default, we does not apply these provisions. The downside for long-term employees is that they start earning vesting credit anew, not earning credit for their work history before the plan.
Vesting for Safe Harbor Plans
A safe harbor 401(k) plan is a type of retirement plan that is deemed to pass certain annual compliance tests that are required for traditional 401(k) plans.
Safe harbor employer contributions—such as basic match, enhanced match, and non-elective contributions—cannot be subject to a vesting schedule and must allow for 100% immediate vesting.
Vesting for Qualified Automatic Contribution Arrangement (QACA) Plans
Unlike most safe harbor plans, safe harbor Qualified Automatic Contribution Arrangement (QACA) Plans allow vesting, with a maximum vesting period of two years. The addition of vesting for safe harbor contributions gives employers a retention tool while simultaneously being deemed to pass certain retirement plan annual compliance tests.
Alternatively, employers can choose to make QACA Safe Harbor contributions immediately vested for employees. And as always, employee contributions are still 100% vested.