Understanding the 401(k) Vesting Rules in the Midst of the Great Resignation

It's more important than ever for clients to understand how vesting can impact their retirement account balances. The applicable vesting schedule establishes when the client who contributes to the 401(k) will be fully entitled to the full 401(k) balance. Cliff vesting is designed to encourage employees to remain with an employer for the long-term, rather than hopping quickly between jobs. The IRC permits employer-sponsored plans to provide that employer contributions to the employee’s account will not fully become available until after a certain period of time has passed (employee contributions must vest immediately). Under a graded vesting schedule, the employer match will begin to vest in increments beginning in the employee’s second year of service with the employer—employer matching contributions will gain an additional 20 percent in vesting each year thereafter until they are 100 percent vested after six years. Under a three-year cliff vesting schedule, the employer match is fully vested after three years of service. The vesting schedule used by the plan must be clearly spelled out in the plan documents, and can be important for clients making decisions about new employment opportunities. For more information on the vesting rules, visit Tax Facts Online. : Q 3869