When it comes to 401K plans, vesting refers to the ownership of the contributions made to the plan. Vesting in a 401K plan means that you have full rights to the contributions made by your employer, including any matching contributions, as well as the earnings on those contributions. There are two types of vesting schedules commonly used by employers: cliff vesting and graded vesting.
Cliff vesting typically means that an employee becomes fully vested in a 401K plan after a certain number of years of service. For example, an employer might use a cliff vesting schedule where employees become fully vested after three years of service.
Graded vesting, on the other hand, allows employees to become gradually vested in their 401K plan over a certain period of time. For instance, an employer might use a graded vesting schedule where employees become 20% vested after two years of service, 40% vested after three years, and so on, until they are fully vested after six years of service.
It's important to note that the specific vesting schedule for a 401K plan is determined by the employer and outlined in the plan documents. Therefore, it's crucial for employees to review their plan documents to understand the vesting schedule that applies to their 401K contributions.
In summary, the timing of when a 401K becomes vested depends on the vesting schedule set by the employer, which can be either cliff vesting or graded vesting, and is outlined in the 401K plan documents provided to employees. This ensures that employees understand when they will have full ownership of their 401K contributions and any matching contributions made by their employer.