401(k) FAQ: 401(k) Vesting

Q: Should a vesting schedule be used or should vesting be 100% upon plan entry?

A: 100% vesting upon plan entry creates a more favorable employee appreciation of the 401(k) plan and prevents resentment arising from employees' lack of entitlement to employer contributions already made on their behalf. However, if there is high turnover, using a vesting schedule may significantly lower employer costs since non-vested amounts are forfeited after employees separate from service.

Q: What types of vesting schedules can we offer?

A: For employer matching contributions, a vesting schedule that is at least as liberal as one that provides 100% vesting after 3 years of service or a 6-year graded vesting schedule (increasing 20% a year and beginning in the second year) must be chosen.

Q: Must we credit all service with the employer towards vesting?

A: Some years of service may be excluded when calculating years of credit for vesting purposes. Employment before age 18 and prior to the establishment of a plan (or predecessor plan) are the main exclusions available. However, possible adverse employee reaction should be considered before these exclusions are adopted.


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