401k’s are a great way for employees to save up for retirement, and part of being a successful business owner is to understand how they work.
One aspect of 401k’s you should be familiar with is “vesting”. This article will give a brief outline of vesting and its role in your business.
If you would like more information about vesting or any other aspect of 401k’s, the experts at lifeincrs are here to advise you.
How does vesting work?
When your employee pays into their 401k you have the option to match it, either fully or a percentage.
Whatever an employee contributes to their 401k, of course, is theirs immediately.
However, the employer may choose to not make their matched funds immediately available, instead requiring that an employee spend a certain amount of time at the company before they have access to them. This is known as vesting.
To say an employee is “fully vested” means they have access to all the funds their employer has put into their 401k. If an employee leaves before they’re fully vested, they will forfeit the non-vested funds.
Vesting Schedules
Often, employers will set up a schedule that allows employees to become incrementally more vested in their matched funds year by year.
For instance, if an employer puts $5,000 into an employee’s 401k and they vest the matched funds at a rate of 20% per year of employment, they would gain access to $1,000 of matched funds every year, becoming fully vested in the fifth year.
Safe Harbor 401k’s
A Safe Harbor 401k plan is a specific kind of 401k setup that allows businesses to avoid burdensome IRS compliance tests.
However, when using one of the Safe Harbor options, the employer will need to choose from pre-approved IRS matching and vesting schedules.
This may or may not align with the company’s goals.
Consider using our Retirement Plan Evaluator to see if a Safe Harbor makes sense for your company. Or, connect with one of our experts for a free consultation.