“Vesting” in employee benefits describes an immediate right to a future asset, that is, the “vested right” is a promise employers grant to employees to a pension, health benefit, or retirement plan at some future date.
A company can choose a variety of methods of vesting employees in their 401K plans, i.e., how they base how they grant benefits based on years of service in the company. Generous companies offer full immediate vesting in which case the employee enjoys the benefit upon hiring. Deferred full or “cliff” vesting employees enjoy nothing until they have completed some specified service period (e.g. 10 years). There are also graded, or class year plans. Each of these plans creates a different risk that the employee may leave benefit money on the table if their employment ends before the vesting promise “kicks in.”
Do Employees Lose Money?
In any type of 401K plan, an employee may begin contributing toward his or her employee matching program on hiring, but unless the employer offers an immediate plan, the employer’s actual matches only begin when the employee’s service period is met. Deferred plans must accrue the funds to match them retroactively. Under no circumstances can the employee’s contributions be used by the employer, but if his or her employment ends prematurely, all of their contributions remain their own.
How Are Forfeited Funds Used?
The accrued matching funds employees forfeit if they leave a company before meeting their service period cannot be restored to the employer – such a practice might create an incentive to companies to thin their ranks in an emergency. Accrued matching funds are returned to the 401K pool.