Vesting Schedules and What Happens When You Leave

Your own contributions to a 401(k) are 100% vested the moment they hit the plan. Your employer's contributions are not — and how soon they become yours depends on a vesting schedule chosen by the plan. Knowing your schedule is worth tens of thousands of dollars when you change jobs.

The two legal options

IRC §411(a)(2)(B) and ERISA §203(a)(2) permit employer matching contributions to vest under either:

• Three-year cliff. 0% vested through year 2; 100% vested at the end of year 3.
• Six-year graded. 20% per year starting at end of year 2, reaching 100% at end of year 6.

Non-elective profit-sharing contributions may use a slightly longer schedule (five-year cliff or seven-year graded) under §411(a)(2)(A). Safe-harbor match and safe-harbor non-elective contributions under §401(k)(12) and §401(k)(13) must be 100% immediately vested by statute.

Worked example: the cost of leaving early

An employee with five years of service has $50,000 of employer match in her 401(k). She is on a six-year graded schedule:

• Year 1: 0% vested
• Year 2: 20%
• Year 3: 40%
• Year 4: 60%
• Year 5: 80% → $40,000 vested, $10,000 forfeited if she leaves now
• Year 6: 100% → $50,000 vested

Staying six more months to cross her sixth service anniversary captures the remaining $10,000 — a 20% raise on her remaining tenure value.

Definition of a "year of service"

Under ERISA §203(b), a year of service is a 12-month period during which the employee worked at least 1,000 hours. The plan defines the 12-month period (usually anniversary of hire). Part-time employees can accumulate service years more slowly. SECURE 2.0 §125 reduced the long-term part-time eligibility threshold from 500 hours over three consecutive years to 500 hours over two years, effective for plan years after 2024 — meaning more part-timers now vest faster.

What happens to forfeited match

Forfeited unvested contributions stay in the plan and are used (per the plan document) to offset future employer contributions, reduce plan administrative expenses, or be reallocated to remaining participants. They do not return to the employer's corporate accounts under most plan documents. Your forfeiture funds your coworkers' future contributions.

What stays yours always

• All of your own elective deferrals (pre-tax and Roth)
• All after-tax employee contributions
• Rollovers from prior plans
• Safe-harbor match and non-elective contributions
• QNECs and QMACs (qualified non-elective and matching contributions used to pass nondiscrimination testing)
• Earnings on any of the above

Common mistakes

• Reading the wrong number on your statement. Statements typically show "account balance" and "vested balance." If you separate today, only the vested balance is yours.
• Quitting in month 11 of a service year. The plan rounds service in 12-month increments. A start date of June 15, 2020 and a separation date of June 1, 2026 = five years of service, not six.
• Forgetting the vesting reset on rehire. Returning to the same employer within five years generally restores prior vesting credit; beyond five years, the "break in service" rules under ERISA §203(b)(3) may erase prior credit.
• Cashing out a small vested balance. Plans can cash out vested balances under $7,000 (the limit was raised by SECURE 2.0 §304) without participant consent. Confirm a rollover destination before separation if your balance is in that range.

Sources

• Internal Revenue Code §411, minimum vesting standards (Cornell LII): law.cornell.edu/uscode/text/26/411
• ERISA §203, minimum vesting standards: law.cornell.edu/uscode/text/29/1053
• SECURE 2.0 Act of 2022, §125 (long-term part-time) and §304 (mandatory cash-out limit), Pub. L. 117-328: congress.gov/bill/117th-congress/house-bill/2617
• U.S. Department of Labor, "What You Should Know About Your Retirement Plan": dol.gov/ebsa publications
• Treasury Regulation §1.411(a)-3T through §1.411(a)-7, vesting requirements: law.cornell.edu/cfr/text/26/1.411(a)-7

RetirementCheck101 models your vested balance and flags upcoming vesting cliffs when you input a job change. Explore the free educational tool.