(Posted at August 27, 2009)
We are coming out of the recession and our economy is showing increased signs of strength every day. However, job losses, while subsiding a bit, are continuing and the employment situation will be in a state of flux for some time to come. Moreover, many people have already lost their jobs this year and may be looking at what to do with the retirement accounts they have left behind. Before you make any decision in this regard, it might be worthwhile to pause and examine what exactly was left behind.
Employer sponsored retirement plans like 401k plans generally have vesting schedules with respect to the amount of money that an employer may put into your account. The money you put away in the form of your 401k deferrals themselves are always “vested” and always belong to you. However, the employer contributions be they matching contributions or profit sharing contributions are often subject to a vesting schedule.
A vesting schedule is a very common retirement plan design technique that encourages employees who are receiving employer monies to remain with the company for a few years before the employees are fully entitled, vested, in those monies. A typical vesting schedule might require an employee to be employed with the company for 3 years, or sometimes even 5 years, before the employee is 100% vested in employer contributions.
A quick example might help illustrate the point. If you deferred $100 into your 401k account and the employer matched it $1 for $1, your matching account would also have $100. If the company had a 5 year vesting schedule and you left after the 3rd, you would only be vested 60% in the matching account. Therefore, your account value, ignoring earnings or losses, would be $160. Simple enough.
How do you earn another year of vesting?
However, as with most things in the retirement world simple sounding things can get complicated quickly. For example, what is a “year” for vesting purposes? Certainly 12 full months would qualify as a year, but can a year be less than Jan-Dec? Well, as the rules would have it, yes. Generally, a year-for-vesting-purposes is any 12 month period in which you work 1,000 hours. So, if you have recently been laid off in let’s say July and you worked full time up until then, it is very likely that you have accrued an additional year for vesting purposes.
Retirement plans can use different methods for determining what a “year” is for vesting purposes, so it is important that you look at your plan’s Summary Plan Description to determine what yours is. Nevertheless, it pays to understand how this works because you could have additional dollars in your old 401k account.