When Does a 401(k) Start? Eligibility and Contributions

A 401(k) plan is a type of employer-sponsored retirement account designed for tax-advantaged savings. It allows employees to contribute a portion of their earnings, which can then grow over time. The question of “when a 401(k) starts” encompasses several distinct aspects, including when an employee becomes eligible to join the plan, when they can begin making their own contributions, and when employer contributions, if offered, commence.

Understanding Eligibility for Participation

Employees must meet employer-set eligibility criteria, subject to Internal Revenue Code regulations, before contributing to a 401(k). A common requirement is an age minimum, typically 21 years old. Employers may also impose a service requirement, which often means an employee must complete one year of service, defined as working 1,000 hours within a 12-month period.

Some plans might offer immediate eligibility for employee contributions, while others may require a waiting period. After meeting eligibility criteria, employees become eligible to participate on specific plan entry dates set by the employer. These can be immediate, monthly, quarterly (e.g., January 1, April 1, July 1, October 1), or semi-annually (e.g., January 1, July 1). The plan document outlines these dates.

Initiating Employee Contributions

Once eligible, employees enroll and set up contributions. This process typically involves accessing enrollment forms or an online portal provided by the employer or the plan administrator. Employees must then make deferral elections, which specify the percentage of their salary they wish to contribute from each paycheck.

A key decision during enrollment is choosing between pre-tax and Roth 401(k) contributions. Pre-tax contributions reduce an employee’s current taxable income, with taxes paid upon withdrawal in retirement. Conversely, Roth contributions are made with after-tax dollars, meaning they do not reduce current taxable income, but qualified withdrawals in retirement are tax-free.

Employees also select investment options from a menu provided by the plan, which commonly include mutual funds, index funds, exchange-traded funds, and target-date funds. Designating beneficiaries ensures account assets are distributed according to the employee’s wishes upon death.

Understanding Employer Contributions

Many employers enhance 401(k) plans by contributing to employee accounts in several forms. Matching contributions are common, where an employer contributes a certain amount based on the employee’s own deferrals, often as a percentage of the employee’s contribution up to a specific limit of their salary. Another type is a profit-sharing contribution, which is a discretionary contribution made by the employer to employee accounts, often independent of employee contributions and typically after the end of the year.

The timing of these employer contributions can vary; some begin immediately upon eligibility, while others may have a waiting period or are made at specific intervals, such as annually or per pay period. Vesting determines when an employee gains full ownership of employer contributions. Common vesting schedules include “cliff vesting,” where an employee becomes 100% vested after a set period, often three years, and “graded vesting,” where ownership increases gradually over several years, typically up to six years. Employer contributions to certain plans, like safe harbor 401(k)s, must be immediately 100% vested.