Qualified 401(k) Administrator (QKA) 1 Practice Exam

Vesting in the context of 401(k) plans refers to the process by which employees earn the right to their employer's contributions over time. When an employee participates in a 401(k) plan, they typically own all their own contributions (the money they put in), but they may not immediately have the right to the employer's contributions (matching or profit-sharing) until they meet certain conditions or a specific period of service.

Vesting schedules can vary by plan; they might be immediate, graded (where employees earn additional rights to contributions gradually), or cliff (where all rights are granted after a certain period). This concept ensures that employees have a strong incentive to stay with the company and encourages long-term employment, as only vested contributions belong to the employee when they leave the company.

Understanding vesting is crucial for employees participating in these plans, as it directly affects the retirement savings they can take with them if they change jobs or leave the workforce.