What Does It Mean to Be Vested After 10 Years?

Vesting in employee benefits refers to the process by which an employee gains non-forfeitable ownership rights to employer contributions made to their retirement accounts or other benefit plans. It establishes the portion of these contributions an employee is entitled to keep, particularly if they leave the company before retirement.

Fundamentals of Vesting

When it comes to retirement plans, employee contributions, such as those deducted directly from a paycheck and deposited into a 401(k), are always 100% vested immediately. This means the money an employee contributes is theirs from the moment it enters the account.

Employer contributions often operate under a vesting schedule. This schedule dictates how and when an employee gains full ownership of the money an employer contributes on their behalf, such as matching contributions to a 401(k) or contributions to a pension plan. Until these employer contributions are fully vested, an employee may forfeit some or all of them if they leave the company.

Common Vesting Schedules

Employers use specific schedules to determine when their contributions become fully vested. The two most common types are cliff vesting and graded vesting. Cliff vesting means an employee becomes 100% vested all at once after completing a specified period of service. For example, a 401(k) plan might have a three-year cliff. An employee owns none of the employer contributions for the first three years, but then becomes fully vested after three years of employment. If an employee leaves before this cliff date, they forfeit all unvested employer contributions.

Graded vesting allows an employee to gain increasing percentages of ownership over several years until they reach 100% vesting. For instance, a common graded schedule for a 401(k) might vest 20% of employer contributions after two years, with an additional 20% each subsequent year, leading to 100% vesting after six years. The Internal Revenue Code sets maximum limits for these schedules in qualified defined contribution plans, generally three years for cliff vesting and six years for graded vesting.

While 10 years is a longer period than typically seen in modern 401(k) plans, it can be relevant in certain legacy pension plans, particularly in the public sector. Some pension plans may require employees to work five to seven years, or even up to 10 years in some states for public employees, to become fully vested. The specific vesting schedule for any benefit plan is determined by the employer and outlined in the plan’s documentation.

Accessing Vested Benefits

Once an employee is fully vested in their employer’s contributions, they have a complete right to those funds, even if they leave the company. The ability to access these funds depends on the plan’s specific distribution rules and the employee’s circumstances.

Common methods for accessing vested funds include taking a distribution upon retirement or termination of employment. Many individuals choose to roll over their vested funds into an Individual Retirement Account (IRA) or transfer them to a new employer’s retirement plan to maintain tax-deferred growth. Withdrawing funds before age 59½ typically incurs a 10% early withdrawal penalty from the IRS, in addition to ordinary income taxes, unless a specific exception applies. These exceptions can include total and permanent disability or certain unreimbursed medical expenses.