If your employer offers a 401(k) match or stock options, they may come with a company vesting schedule. Find out what it means to be vested and how it should factor into decisions about your employment.
If you have a workplace benefits package, some of your perks may come with a "vesting schedule" or "vesting period." It's critical to understand how vesting works and consider it before deciding to leave your job.
This post will explain different types of vesting and answer frequently asked questions, so you get the most from your benefits at work.
What does it mean to be vested with a company?
Vesting is a legal term that means you have the right to something, such as a payment or benefit. It's typically used in retirement plan language to set a timeline for when a participating employee earns the right to keep employer matching, profit-sharing contributions, or other benefits.
Vesting is an employee retention tool that companies use to keep top talent from leaving. It can be helpful in industries where worker turnover is high or skills are in high demand. By offering you a financial incentive to stay employed longer, you may be less likely to job hop.
Leaving a company before you've worked long enough to be vested comes with negative consequences, such as forfeiting employer-provided stock incentives or contributions to your retirement plan.
So, being vested means you officially get to keep certain employee benefits if you leave your job. Leaving a company before you've worked long enough to be vested comes with negative consequences, such as forfeiting employer-provided stock incentives or contributions to your retirement plan.
How long a vesting period lasts varies from company to company. However, a typical vesting schedule is from three to five years. Being fully vested means that you get to keep 100% of the benefits, and being partially vesting means you get a percentage of them based on a predetermined schedule.
Note that you're always 100% vested in your contributions to a retirement plan, no matter when you leave a company. According to federal law, the Employee Retirement Income Security Act (ERISA), employers can't take workers' elected contributions to a retirement plan.
How 401(k) vesting works
As previously mentioned, when you invest in a workplace retirement plan, such as a 401(k), contributions from your paycheck are immediately 100% vested. However, most companies have a vesting schedule for their matching contributions.
For instance, they might match your contributions up to 3% of your salary. If you earn $60,000 and contribute 3% or $1,800 to your 401(k), your employer would also contribute $1,800 for the year.
But the company's portion of your retirement account won't officially be yours until you're fully vested. Or, if you're partially vested, you may be eligible to keep a certain percentage of the matching funds.
How stock vesting works
Some companies offer another workplace benefit to high-level employees: stock options or restricted stock units (RSUs). They're "restricted' because they typically come with a vesting schedule.
For example, let's say your benefits package gives you 100 RSUs. You might get access to them on the following timeline:
Year 1: 25 units are vested
Year 2: 50 units are vested
Year 3: 75 units are vested
Year 4: 100 units are vested
After Year 2, if you leave the company, you'd get to keep 50 RSUs and forfeit the other half. If you left at Year 3, you'd get 75, and so on.
Different types of company vesting schedules
There are two primary types of company vesting schedules: graded and cliff. Graded vesting is the most common and gives employees benefits gradually over several years. That allows you to own some percentage of benefits even if you leave the company after a year or two, as mentioned in the RSU example above.
A typical graded vesting schedule occurs over five years as follows:
Year 1: 20% vested
Year 2: 40% vested
Year 3: 60% vested
Year 4: 80% vested
Year 5: 100% vested
If your employer contributed $20,000 to your 401(k) as a profit-sharing bonus, you'd have to stay over five years to get the full amount. But if you left during Year 3, you'd get to keep the prior year's vesting of 40% or $8,000.
Cliff vesting happens all at once rather than gradually over time. For instance, your employer may require you to stay with the company for three years to become fully vested and not offer any partial vesting. Once you complete three years of service, 100% of employer contributions are yours. But if you leave before completing three years, you get no benefit.
If you have questions about your company’s vesting schedule, consult your HR department or a financial advisor who can help evaluate your benefits.
Frequently asked questions about company vesting
Here are answers to some frequently asked questions about 401(k) vesting and stock vesting.
What happens if you leave a company before you're vested?
If you leave a company before you're vested, you may forfeit some or all of your employer's benefits, such as profit-sharing, matching contributions, and stock options. The exact amount you'd give up depends on your company's vesting schedule. For instance, if you're 80% vested, you'd own 80% of the benefits subject to a vesting period, and your employer would take back the remaining 20%.
How do you know if you're fully vested in your company's 401(k)?
There are a few ways to find out if you're fully vested in your company's 401(k):
Log into your online 401(k) and check your balance. You should see entries for your contributions, your employer's, and your "vested balance." If the vested amount matches what your employer has put in, you're fully vested. If not, the vested balance shows how much you currently own.
Contact your HR department. An HR representative can give you details on your benefits and any vesting schedules.
Check your employee records. Your 401(k) plan document should include any vesting schedule.
Is a company match worth it if you're not fully vested?
Employer matching is free money that can grow over time. Therefore, it's still a valuable benefit even if you only end up with a portion when you leave your company. Plus, some company vesting schedules may only last a few years. So, be sure to contribute enough to your retirement plan to max out any match.
Is it okay to leave a job before you're fully vested?
In some situations, it may make sense to leave a job before you're fully vested, even if it means losing some or all of your benefits. For instance, if you get a job offer that's $20,000 higher and your vested benefit is $15,000, you'd come out ahead by taking the new job. Just be sure to consider your total benefits package, commute time, future opportunities, and other factors before leaping to a new company.