When a 401K is fully vested, it means that the employee has complete ownership of all the funds in their retirement account, including both their contributions and any employer contributions or matching funds. Full vesting typically occurs after a certain period of time, known as the vesting period, during which the employee gradually earns ownership rights to the employer contributions. The vesting period is determined by the employer and can vary, but it is commonly around three to five years. Once the vesting period is complete, the employee is entitled to the full amount of the employer contributions, regardless of whether they continue working for the company or not.
It's important to note that if an employee leaves the company before the vesting period is complete, they may only be entitled to a portion of the employer contributions, or none at all, depending on the specific vesting schedule. This is known as partial vesting. The portion of the employer contributions that the employee is entitled to is determined by the vesting schedule, which outlines the percentage of employer contributions that become vested each year. For example, a vesting schedule might state that 20% of the employer contributions become vested after the first year, 40% after the second year, and so on, until the employee is fully vested after the specified vesting period.
It's also worth mentioning that employee contributions to a 401K are always fully vested, meaning the employee has immediate ownership of their own contributions. Only the employer contributions are subject to vesting rules.
I hope this explanation helps! Let me know if you have any further questions.