Are there any circumstances in which unvested employer 401(k) contributions revert to the employee?

Question

Many companies (including a former employer of mine) have 401(k) vesting schedules. The idea is that the employee keeps all of his/her contributions, and the employer piece has a percentage that you can only cash out if you stay with the company for a certain period of time. If I leave, that money cannot be taken, although if I return, in some situations, that money is still credited to me.

Recently, I had a situation, however, that pleasantly surprised me, but I'd like to figure out what happened. I was not vested at all in the employer contributions to my 401(k), but when the company was sold and my 401(k) transferred to a new holder of record, the employer portion was credited to me. They have since rolled it over a second time, and it still appears to be credited to me.

Why did this happen? Was it simply clerical error, or is there some situation that may have triggered a recharacterization of funds? I ask, for the simple reason I have a second 401(k) that is in a similar situation - there is a pretty healthy unvested portion. Rather than roll it over, does it make sense to wait for that company to be purchased, in the hopes that a similar "mistake" occurs?

In general, I'm curious what happens to any unvested employer contributions - are there any circumstances in which it reverts to the employee?

Answer 1

I highly doubt this was a mistake. In the event of a corporate merger/buyout, changes to employee 401(k) plans are usually hashed out as part of the M&A agreement. The choices made in the agreement depend on numerous factors, so it may be difficult to predict what happens to your plan in situations like this. A quick online search reveals a few articles, e.g. this one from expertplan.com, that list the three most common consequences for retirement plans:

1. The plan is terminated
2. The plan continues as before
3. The plan may be merged with the plan of the new corporate entity or parent company. The new plan may be similar to your previous plan, or it might not be. In the event of a buyout, the purchasing company may simply roll 401(k) plans from the purchased company into their current plan.

It sounds like the company that purchased your employer agreed to immediately vest employees in employer 401(k) contributions as part of the purchase agreement. Without knowing the details of the merger/buyout, I can't say this for sure, but this sounds like a plausible way to keep employees of the purchased company content.

Rather than roll it over, does it make sense to wait for that company to be purchased, in the hopes that a similar "mistake" occurs?

Since this doesn't sound like a mistake, but rather a part of the buyout agreement, I don't think it's something you should count on in the future. It may be very likely, or it could be a relatively rare occurrence that happened to be part of this purchase agreement.

I don't believe the Employee Retirement Income Security Act regulates what can or can't be done to your 401(k) in a buyout, except that the company is required to inform you of any changes (and obviously, the new 401(k) plan must conform to ERISA as well).

Answer 2

An employer can decide that the employee funds are automatically vested. The new company could have had a more aggressive vesting schedule and grandfathered in all the employees of the company they acquired. This could have been part of the purchase negoaitaions.

I would be surprised if they did it for employees that left years ago, especially if they were beyond the return period. I wouldn't keep money in a plan with a former employer just in case it happens.

Check the plan documents to see all the verbiage regarding vesting here is a paragraph from one:

You will receive one year of vesting service for each calendar year during which you complete 850 or more hours of service. Once you have five years of service, your account is fully vested and any future Company contributions made to your account will be immediately vested. Full vesting also occurs at age 59½, total disability or death while employed by the Company. If you leave the Company prior to 100% vesting, any unvested portion of your Plan account will be forfeited.