What is 401k Vesting?
If you have a 401k plan you should be interested in vesting. But what is 401k vesting? What exactly does 401k vesting mean? The answer is quite simple.
Let's take a look at the meaning of the word vesting and how you can determine your own vested percentage, and what money you might get if you leave employment and take a distribution now.
Money Types for 401k Vesting
In a 401k plan there are different types of money as far as the vesting rules are concerned. First, there is your money. That is, money that you put into the plan from your own pocket. This would include money deducted from your paycheck as a pre-tax or Roth deferral since that money would have gone directly into your pocket if you had not contributed it to the 401k plan. This would also include money that you rollover into a 401k plan from some other plan. Your money, or money you contributed in this way, is always 100% vested. That means 100% of the money is yours right now if you leave the company and take money out of the 401k as a distribution.
The other kind of money is the company’s money. That is money that the company put into the plan for you that they didn’t really have to. Examples of company money would be an employer matching contribution, a profit sharing contribution, or a safe harbor match or non-elective contribution. These sources of employer money may have a vesting schedule attached to them which prevents you from “owning” the money for a number of years.
Example of Vested Percentage
Your Balance
| $10,000
|
Your Vested Percentage
| 40%
|
Your Distribution if You Distribute Now
| $4,000
|
Your Forfeited Amount if You Distribute Now
| $6,000
|
More About Employer Contributions
What is 401k vesting on these safe harbor match and non-electing contributions? Well, the good news for you is that it is 100% vested. That means what you see in your account is yours. The employer agrees to this because, in return, they don’t have to follow certain rules if they agree to provide you with these contributions.
However, for the standard employer match and profit sharing contributions, your employer may have a vesting schedule. What is a 401k vesting schedule again? Well, it means that the money transitions from belonging to your employer to belonging to you. Here is an example. If your plan has a vesting scheduled of 20% per year for 5 years, it means that you are 20% vested after 1 year, 40% vested after 2 years, and so on, until you are 100% vested. So, after 1 year if you had $1000 in your employer match account and were 20% vested, $200 would be yours if you left the company and the plan would take back the other $800.
Final Thoughts on 401k Vesting
Please note that one year of vesting is defined by your plan. It is not simply a year on the calendar. You most likely have to work a certain number of hours in that year to qualify for an additional year of vesting. That number is very likely 1000 hours.
Hopefully this has made the concept of 401k vesting simpler. Now, when a friend asks you “What is 401k vesting?” you can go ahead and provide the answer.
