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What Does Vesting Mean? What is a Retirement Plan Vested Balance?

What is Vesting?

In retirement plans, vesting means ownership. Vesting is expressed as a percentage. The percentage indicates how much ownership a participant has over an account balance or accrued benefit.

In 401(k) Plans, participants can contribute money from their pay. This is known as an elective deferral contribution or salary deferral contribution. Participants always have 100% ownership over these contributions, plus any investment gains (or losses). However, money contributed by an employer to a participant's account may be subject to a vesting schedule.

What is a Vesting Schedule?

A vesting schedule is like a staircase. Each step in the staircase represents a greater ownership percentage, until you finally reach 100% ownership. Climbing the staircase generally means working longer for your employer. Employers have some flexibility in vesting schedule design and their length, so one retirement plan may differ from another. However, all vesting schedules follow either a cliff or graded format. The following example shows the difference between these formats:

Years of Service Cliff Vesting Schedule (3-Year ) Graded Vesting Schedule (6-Year )
0 0% 0%
1 0% 0%
2 0% 20%
3 100% 40%
4 100% 60%
5 100% 80%
6 100% 100%

What is a Vested Account Balance?

A vested account balance is the portion of a retirement plan account owned by the participant. A vested account balance equals the vesting percentage multiplied by the account balance. A vested account balance can equal the account balance only if the vesting percentage is 100%. In any other instance, the vested account balance will always be less than the account balance. As an example, suppose the vesting percentage is 40% and the account balance is $12,000. In this example, the vested account balance is $4,800.

If I Leave, What Happens to the Unvested Balance?

The account balance minus the vested account balance equals the unvested account balance. Sadly, the unvested account balance is forfeited. In 401(k) Plans, forfeited account balances never revert to employers. However, forfeited account balances can reduce future employer contributions or pay administrative expenses.

Why do Plans have Vesting Schedules?

Employers often provide retirement benefit plans to attract and retain workers. Vesting schedules can help retain workers because employees may think twice about leaving if they would forfeit a large retirement account balance.

How Can I Get Information About Vesting in My Plan?

If you have questions about your plan's vesting, refer to your Summary Plan Description (SPD) or an annual benefit statement. If you do not have an SPD or annual benefit statement, your employer, human resources department, or retirement plan service provider should be able to assist you.

Key Takeaways

  • Vesting is the percentage ownership of an account balance or accrued benefit.
  • Vesting generally increases with additional years of service.
  • A vested account balance is the account balanced owned by a participant.
  • Participants should always consider vesting when making future employment decisions. Leaving your employer might cost you a lot of money.

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The federal government annually publishes updated qualified retirement plan limits, which impact the contributions, benefit accruals, and compliance of ERISA covered qualified retirement plans. The below tables summarize the most significant changes in recent history.


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