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Craig R. Bolotsky, CPA
Dear Craig,
Although I can contribute to my 401(k) after a year of employment at my current job and the company matches 100% of the first 6% of my salary, I’m not completely ‘vested’ for another 5 years. What does that mean?
-Amanda C.
Dear Amanda,
VESTING: The process by which employees accrue non-forfeitable rights over employer contributions that are made to the employee’s qualified retirement plan account.
Vesting affects only the amount of funds matched and contributed by your employer. Each year that you stay with your company, you earn the right to twenty percent (20%) more of your matched funds. The employer’s matched funds and income earned on those funds are “vested” to you each year at a twenty percent increment, (hence, 5 years at 20% per year equals 100% ). This benefit package structure entices long-term employment since you forfeit some of the matched contributions if you leave your job in less than five years.
(Arbitrarily, if you make $100,000, the company would completely match $6,000 in contributions, or 6% of your salary. If you contributed $6,000 and then left your job after three years, the company would only be responsible for 60% of their total contribution, or $3,600. If you still only contributed $6,000 and stayed for five years, the company would then be responsible for $6,000 since you would be 100% vested). The five-year vesting requirement is only used to make the calculation of the company match at the time you terminate your employment.
Regardless of vesting, the total of your current contributions and the income earned on the money that you’ve contributed is yours.
Please contact me with any further questions: 201-436-4800.
Craig
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