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Vesting is defined by Webster’s as a “fully and unconditionally guaranteed as a legal right, benefit, or privilege.” This describes 401k vesting pretty well.
To be fully vested in a 401k plan means to have full rights to the assets in your 401k account. To be partially vested means to have partial rights to the assets in your 401k account.
First, all of the money you put into your 401k account is fully vested. It is yours, subject to the 401k distribution rules established by the IRS and by the employer’s plan.
Second, all or some of the money contributed by your employer to your account may not be fully vested to you. Vesting rules established by your employer may prohibit you from not only gaining access to the assets, but also having legal right to the assets.
For example, an employer may restrict an employee’s access to the 401k match or a profit sharing component within a company retirement plan. Remember, these two components are contributed by the employer, not the employee. And as an enticement to retain key employees, employers may restrict legal right to the assets for a period of time.
Don’t confuse 401k rules with other restrictions. Restrictions such as those imposed by the IRS, for example, do not have anything to do with 401k vesting rules. Early 401k withdrawal penalties established by the IRS are in place for all funds within a 401k account. However, vesting restrictions are set up by employers to entice quality employees to remain employed with the company.
Other Account Vesting Rules
Simple IRA’s, SEP’s, and 401k safe harbor plans do not allow for vesting restrictions to be put in place by employers. All funds, including employee AND employer contributions are fully vested to the employee upon receipt of the funds into the account.
What Happens to My Vested 401k When I Quit My Job and then Come Back?
If you leave your company and return, you may be able to count your earlier period of employment towards the years of service needed for vesting in the employer-provided benefits. Unless your break in service with the company was 5 years or the time equal to the length of your pre-break employment, whichever is greater, you likely can count that time prior to your break.
Because these rules are very specific, you should read your plan document carefully if you are contemplating a short-term break from your employer, and then discuss it with your plan administrator.
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