A retirement account statement can overstate what a departing employee actually keeps. Vesting decides which share of the employer's money genuinely belongs to the worker.
Employee and employer money are treated differently
Amounts a worker contributes from their own pay are immediately and fully theirs. Federal law does not permit a plan to make a worker forfeit their own deferrals.
Employer contributions, including matching amounts and profit sharing, can be subject to a vesting schedule that the plan document sets within statutory limits.
Until the schedule is satisfied, those amounts appear in the account balance but remain conditional on continued service with the employer.
Two schedule shapes dominate
A cliff schedule vests nothing until a stated period of service is completed, at which point the entire employer balance becomes fully vested at once.
A graded schedule vests a rising percentage each year until it reaches full vesting, so a departing worker keeps a portion proportional to years served.
Federal rules cap how long either schedule may run, and the applicable maximum depends on the type of contribution involved and on the plan's design.
Service is counted by plan rules
A year of vesting service is defined in the plan document, frequently by hours worked in a plan year rather than by calendar time since the hire date.
Part time schedules, leaves of absence and rehires are governed by specific counting and break in service rules that vary between plans.
Because the definition sits in the plan document, two employees with identical tenure at different employers can have different vested percentages.
Forfeitures return to the plan
Unvested amounts left behind by departing employees are forfeited and generally used to reduce future employer contributions or to pay plan expenses.
Nothing is returned to the departing worker, and the forfeiture takes effect according to the timing rules in the plan rather than immediately on the last day.
Rollovers move only the vested balance, so the amount that can be transferred to a new plan or an individual account reflects the vested figure.
Certain events accelerate vesting
Plans commonly provide full vesting on reaching the plan's normal retirement age, on death, or on disability as defined in the plan document.
Termination of the plan itself generally triggers full vesting for affected participants under federal rules governing plan wind ups.
The vested percentage appears on the participant statement and in the summary plan description, and questions about a specific balance belong with the plan administrator.