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Say a person works for an employer for 2+ years based on the statement (promise?) that they will be 100% vested in their 401k employer match after 5 years. Is the employer then permitted to change the rules so that it will take the employee 6 years to be fully vested?

From my research it seems they may be allowed to do this provided they don't reduce the percentage already vested at any point? However even given that, it would still seem unfair since the job would have been partly been accepted based on the original promise, and when the vesting schedule is made worse, then at the point it's made worse, it's like telling someone, hey that money you have been anticipating (and working under the assumption) to be fully yours by year 5 will now take until year 6 to be fully yours.

EDIT: I just found the following guidance on the IRS website

https://www.irs.gov/retirement-plans/change-in-plan-vesting-schedules

Seems from this link (esp. the example they offer) that there are actually quite tight restrictions on what employers can do... e.g. seems to me that if accrued non-vested amounts are additionally restricted by a worsened future vesting schedule, that this may not be allowed after all? And even for people with less than 3 years service?!

  • 2
    Six years is indeed the maximum time to be fully vested (see, for example, this IRS document), but whether an employer can modify the 401(k) plan so that instead of full vesting after 5 years, full vesting occurs after 6 years of service is more complicated to determine. – Dilip Sarwate Jan 6 '17 at 23:56
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My interpretation of the IRS link you provided is that any amount of existing employer contributions must follow the least restrictive of the old and new vesting schedules, AND, any participating employee who has been an employee for at least 3 years can elect to stay on the old plan if the wish (for both existing and future contributions). Perhaps this could be best explained with an example:

Old Vesting Schedule:

  • 1 year = 20%
  • 2 years = 40%
  • 3 years = 60%
  • 4 years = 80%
  • 5 years = 100%

New Vesting Schedule:

  • 2 year = 20%
  • 3 years = 40%
  • 4 years = 60%
  • 5 years = 80%
  • 6 years = 100%

You mentioned you have 2 years, so for this example you currently would be vested at 40%. Had you had 3 years you could elect to completely stay on the old plan and all of your existing and future contributions would be fully vested after 5 years. But with less than 2 years it works like this:

  • All employer contributions that you have at the time of the plan change will continue to vest on the old schedule (completely vested after 5 years- up to 3 years from now).
  • All future employer contributions that you receive will vest on the new schedule (completely vested after 6 years - up to 4 years now.) Contributions you receive "today" would be vested at 20%, whereas those that were made "before" were vested at 40%.

It may be easier to conceptualize this as your account "splitting" into two separate accounts on the day of the plan change, with all new contributions going into the second account and each account vesting at its respective schedule.

  • Ok thanks, that makes sense... yet I read the example further down the IRS link and it says their example employee with just 1 year service, still has his protected benefits restricted un-permissibly by the change in schedule? – Brad Thomas Jan 7 '17 at 14:57
  • @BradThomas - sorry about that, I didn't get it quite right the first go around. I've fixed it now. – TTT Jan 7 '17 at 17:20
  • I'd add more explicitly, once you vest in an amount, they can not take that from you, ever. They can only change the vesting schedule on a prospective basis. (See IRC 411(d)(6)) – kazoni Jan 28 '17 at 5:25
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Unless the rules are in your contract, and unless the change is flat-out illegal (which you would need to ask over in Law.stackexchange, or better ask a real lawyer), it probably counts as policy and is indeed subject to change at any time.

It could be worse. I was recently told that about 20 weeks of my eventual retirement severance package has evaporated. Again, policy, not guarantee; annoying but short of trying to unionize and go on strike over it there really isn't any productive response.

  • Interesting. I just found an IRS link however, and updated my question which may shed further light on this. I'm still not 100% clear and I do appreciate your answer. – Brad Thomas Jan 7 '17 at 1:39

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