What does 'vesting' mean in a 401(k) plan?
Vesting refers to the percentage of employer contributions an employee owns over time. Employees always have full ownership of their own contributions, but employer contributions may follow a vesting schedule that determines when they become fully owned by the employee.
What types of vesting schedules does Betterment support?
Betterment supports immediate vesting for all plan tiers. Betterment supports graded and cliff vesting for Pro-level plans and above. Employers can choose a vesting schedule that best aligns with their retention strategy and business goals.
What are the common types of vesting schedules?
- Immediate Vesting – Employees gain full ownership of employer contributions right away.
- Graded Vesting – Ownership increases gradually over a set period, such as 20% per year, until reaching 100% after a specified number of years.
- Cliff Vesting – Employees become fully vested all at once after completing a required service period, such as three years.
Are there legal requirements for vesting schedules?
Yes, regulations set maximum vesting periods to help ensure employees gain access to employer contributions within a reasonable timeframe. For example, cliff vesting cannot exceed three years, and graded vesting must fully vest employees by six years of service.
How can vesting schedules help with employee retention?
Vesting schedules encourage employees to stay with a company longer to gain full access to employer contributions. A longer vesting period can serve as an incentive for retention, while an immediate vesting schedule may be more attractive for recruitment.
Are employee contributions subject to vesting?
No, employees always have full ownership of the money they contribute to their 401(k) plan. Vesting schedules only apply to employer contributions.
What happens to unvested employer contributions if an employee leaves the company?
If an employee leaves before becoming fully vested, they forfeit the unvested portion of employer contributions in the plans forfeiture account. The vested portion, along with their own contributions, remains in their account and can be rolled over or left in the plan.
Do all employer contributions follow the same vesting schedule?
Not necessarily. Certain employer contributions, such as those in Safe Harbor 401(k) plans, are typically 100% vested immediately. Other contribution types may follow graded or cliff vesting schedules.
Can an employer change the vesting schedule of a 401(k) plan?
Employers can update the vesting schedule, but changes cannot reduce the vested benefits employees have already earned. Any modifications must comply with legal requirements and be communicated to employees in advance.
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