What Is a Vested Account Balance and How Does It Work?

Your vested account balance is the portion of your employer-sponsored retirement plan that you own unconditionally. If you leave your job, this is the amount of money you are entitled to take with you. Vesting is the process of earning ownership of certain company contributions over time, which impacts financial decisions related to career changes.

Components of a Retirement Account Balance

A retirement account’s total balance is composed of three sources of funds. The first component is your own contributions, which are the amounts deferred from your paycheck. You always have 100% ownership of the money you contribute to your account.

The second component consists of contributions made by your employer. These can include matching contributions, where the company adds money based on how much you save, or non-elective contributions like profit sharing. Employer contributions are the funds subject to vesting rules.

The third component is investment earnings, representing the growth or loss from investments. The ownership of these earnings is directly tied to the ownership of the contributions that generated them.

Understanding Vesting Schedules

Funds contributed by your employer often require a period of service before you gain full ownership. This process is governed by a vesting schedule, detailed in your plan’s documents. The Employee Retirement Income Security Act of 1974 (ERISA) sets the maximum timeframes employers can require for vesting.

Employers commonly use two types of vesting schedules. The first is “cliff” vesting, where you become 100% vested in all employer funds at once after a specific period. Under federal law, a cliff vesting schedule cannot require more than three years of service. If your company uses a three-year cliff, you own 0% of employer funds if you leave before three years, but you own 100% on your third anniversary.

The second type is “graded” vesting, where your ownership percentage increases incrementally over time. A graded schedule cannot exceed six years of service and must provide at least 20% vesting after two years, with an additional 20% for each subsequent year. A common six-year graded schedule grants 20% ownership after two years, 40% after three, and continues until you are 100% vested after six years.

Calculating Your Vested Amount

To determine your vested account balance, first locate your most recent account statement and your plan’s vesting schedule, which is in the Summary Plan Description (SPD). The statement will show your total balance and a breakdown of contribution sources.

Your calculation starts with the total amount of your own contributions. Next, identify the total employer contributions in your account and apply your plan’s vesting percentage, based on your years of service, to this amount.

Finally, you must account for investment earnings. The earnings on your contributions are fully yours, while earnings on employer contributions are vested at the same percentage as the contributions themselves. Your total vested balance is the sum of your contributions, the vested portion of employer funds, and all associated vested earnings.

Forfeiture of Non-Vested Funds

If you leave your company before being fully vested, you must forfeit the non-vested portion of employer contributions and their associated earnings. For example, if you are 40% vested in $10,000 of employer funds, you would keep $4,000 and forfeit the remaining $6,000.

Forfeited funds are returned to the employer, who cannot take them as cash. Instead, plan documents specify how this money must be used, such as paying for administrative expenses, reducing future employer contributions, or reallocating the funds to remaining participants’ accounts.

Certain events can trigger immediate 100% vesting, overriding the standard schedule. These include reaching the plan’s normal retirement age, the termination of the retirement plan, or upon the employee’s death or disability.