Earning and Vesting in Workplace Retirement Benefits

Adapted from What You Should Know About Your Retirement Plan, published by the U.S. Department of Labor; selected section: Chapter 2: Earning Retirement Benefits. The source text is reproduced with headings and formatting adjusted for this guide.

Chapter 2: Earning Retirement Benefits

Once you have learned what type of retirement plan your employer offers, you need to find out when you can participate in the plan and begin to earn benefits. Plan rules can vary as long as they meet the requirements under Federal law. You need to check with your plan or review the plan booklet (called the Summary Plan Description) to learn your plan's rules and requirements. Your plan may require you to work for the company for a period of time before you can participate in the plan. In addition, there typically is a time frame to begin to accumulate benefits and earn the right to them (sometimes referred to as "vesting").

Who can participate in your employer's retirement plan?

Find out if you are within the group of employees covered by your employer's retirement plan. Federal law allows employers to include certain groups of employees and exclude others from a retirement plan. For example, your employer may sponsor one plan for salaried employees and another for union employees. Part-time employees may be eligible if they work at least 1,000 hours per year, which is about 20 hours per week. So if you work part time, find out if you are covered.

When can your participation begin?

Once you know you are covered, you need to find out when you can begin to participate in the plan. You can find this information in your plan's Summary Plan Description. Federal law sets minimum requirements, but a plan may be more generous. Generally, a plan may require an employee to be at least 21 years old and to have a year of service with the company before the employee can participate in a plan. However, plans may allow employees to begin participation before reaching age 21 or completing one year of service. For administrative reasons, your participation may be delayed up to 6 months after you meet these age and service criteria or until the start of the next plan year, whichever is sooner. The plan year is the calendar year, or an alternative 12-month period, that a retirement plan uses for plan administration. It is important that you learn the rules for your employer's plan.

Employers can require additional years of service in some circumstances. For example, if your plan allows you to vest (discussed in detail later in this chapter) immediately upon participating in the plan, it may require that you work for the company for two years before you can participate in the plan.

Federal law also imposes other participation rules for certain circumstances. For example, if you were an older worker when you were hired, you cannot be excluded from participating in the plan just because you are close to retirement age.

Some 401(k) plans and SIMPLE IRA plans enroll employees automatically. This means that you will automatically become a participant in the plan unless you choose to opt out. The plan will deduct a set contribution level from your paycheck and put it into a predetermined investment. If your employer has an automatic enrollment plan, you should receive a notice describing the automatic contribution process, when your participation begins, your opportunity to opt out of the plan or change your contribution level and where your automatic contributions are invested. If you are in a 401(k), the notice will also describe your right to change investments, or if you are in a SIMPLE IRA plan, your right to change the financial institution where your contributions are invested.

When do you begin to accumulate benefits?

Once you begin to participate in a retirement plan, you need to understand how you accrue benefits. Your accrued benefit is the amount of retirement benefits that you have accumulated or that have been allocated to you under the plan at any particular point in time.

Defined benefit plans often count your years of service in order to determine whether you have earned a benefit and to calculate how much you will receive in benefits at retirement. Employees in the plan who work part time, but who work 1,000 hours or more each year, must be credited with a portion of the benefit in proportion to what they would have earned if they were employed full time. In a defined contribution plan, your benefit accrual is the amount of contributions and earnings that have accumulated in your 401(k) or other retirement plan account, minus any fees charged to your account by your plan.

Special rules for when you begin to accumulate benefits may apply to certain types of retirement plans. For example, in a Simplified Employee Pension (SEP) Plan, all participants who earn at least $650 a year from their employers are entitled to receive a contribution.

Can a plan reduce promised benefits?

Defined benefit plans may change the rate at which you earn future benefits but cannot reduce the amount of benefits you have already accumulated. For example, a plan that accrues benefits at the rate of $5 a month for years of service through 2021 may be amended to provide that for years of service beginning in 2022, benefits will be credited at the rate of $4 per month. Plans that make a significant reduction in the rate at which benefits accumulate must provide you with written notice generally at least 45 days before the change goes into effect.

In most situations, if a company terminates a defined benefit plan that does not have enough funding to pay all of the promised benefits, the Pension Benefit Guaranty Corporation (PBGC) will pay plan participants and beneficiaries some retirement benefits, but possibly less than the promised benefits. (For more information, see the PBGC's website.)

In a defined contribution plan, the employer can change the amount of employer contributions in the future. The employer may also stop contributing for a few years or indefinitely depending on the plan terms.

An employer can terminate a defined benefit or a defined contribution plan, but cannot reduce the benefit you have already accrued.

How soon do you have a right to your accumulated benefits?

You immediately vest in your own contributions and the earnings on them. This means you have earned the right to these amounts without the risk of forfeiting them. But note – there are restrictions on actually taking them out of the plan. See the discussion on the rules for distributions later in this publication.

However, you do not necessarily have an immediate right to any contributions made by your employer. Federal law provides a maximum number of years a company may require employees to work to earn the vested right to all or some of these benefits. (See tables showing the vesting rules.)

In a defined benefit plan, an employer can require that employees have 5 years of service in order to become 100 percent vested in the employer-funded benefits (called cliff vesting). Employers also can choose a graduated vesting schedule, which requires an employee to work 7 years in order to be 100 percent vested, but provides at least 20 percent vesting after 3 years, 40 percent after 4 years, 60 percent after 5 years, and 80 percent after 6 years of service. The permitted vesting schedules for current defined benefit plans are shown in Table 3. Plans may provide a different schedule as long as it is more generous than these vesting schedules. (Unlike most defined benefit plans, in a cash balance plan, employees vest in employer contributions after 3 years.)

In a defined contribution plan such as a 401(k) plan, you are always 100 percent vested in your own contributions and any subsequent earnings from your contributions. However, in most defined contribution plans, you may have to work several years before you are vested in the employer's matching contributions. (There are exceptions, such as the SIMPLE 401(k) and safe harbor 401(k), in which you are immediately vested in all required employer contributions. You also vest immediately in the SIMPLE IRA and the SEP.)

Currently, employers have a choice of two different vesting schedules for employer matching 401(k) contributions, which are shown in Table 2. Your employer may use a cliff vesting schedule in which employees are 100 percent vested in employer contributions after 3 years of service. Under a graduated vesting schedule, an employee must be at least 20 percent vested after 2 years, 40 percent after 3 years, 60 percent after 4 years, 80 percent after 5 years, and 100 percent after 6 years. If your automatic enrollment 401(k) plan requires employer contributions, you vest in those contributions after 2 years. Automatic enrollment 401(k) plans with optional matching contributions follow one of the vesting schedules noted above.

Employers making other contributions to defined contribution plans, such as a 401(k) plan, also can choose between the graduated and cliff vesting schedules. For those contributions made since 2007, they can choose between the schedules in Table 2. For contributions made prior to 2007, they can choose between the schedules provided in Table 3.

You may lose some of the employer-provided benefits you have earned if you leave your job before you have worked long enough to be vested. However, once vested, you have the right to receive the vested portion of your benefits even if you leave your job before retirement. But even though you have the right to certain benefits, your defined contribution plan account value could decrease as a result of investment performance after you leave your job.

Note

If you leave your company and return, you may be able to count your earlier period of employment towards the years of service needed to vest in the employer-provided benefits. Unless your break in service with the company was 5 years or a time equal to the length of your pre-break employment, whichever is longer, you likely can count that time prior to your break. Because these rules are very specific, you should read your plan document carefully if you are contemplating a short-term break from your employer, and then discuss it with your plan administrator. If you left employment before January 1, 1985, different rules apply. For more information, contact the Department of Labor electronically or by calling toll free at 1-866-444-3272.

For Reserve and National Guard units called to active duty, the Uniformed Services Employment and Reemployment Rights Act (USERRA) requires that the period of military duty be counted as covered service with the employer for eligibility, vesting, and benefit accrual purposes. Returning service members are treated as if they had been continuously employed regardless of the type of retirement plan the employer has adopted. However, a person who is reemployed is entitled to accrued benefits resulting from employee contributions only to the extent they actually make the contributions to the plan.

Vesting Rules

Generally, an employer must count your years of service for vesting credit starting with your date of employment. Two exceptions provide that your employer can start counting your years of service with the first plan year following (1) your 18th birthday if you were under 18 years of age when you started working there, and (2) the date you start contributing to a 401(k) plan if you elected not to contribute when you were first eligible.

Plans can allow employees the right to employer-provided benefits sooner than indicated in the following tables.

Minimum Vesting Requirements Under ERISA
Employer Contributions
(Use Table in Effect on Date You Left Employer)

Table 2 below shows the current vesting schedules, as of 2002, for employer matching 401(k) plan contributions, and for other employer contributions to a defined contribution plan as of 2007.

Table 3 is for employees in a defined benefit plan. It is also for employees receiving other employer contributions to a defined contribution plan before 2007*, employer matching 401(k) contributions prior to 2002, and employees in a defined contribution plan who left an employer after December 31, 1988.

*If your plan is top heavy, Table 2 applies.

Table 4 is for employees who left before 1989.

Rule of 45- If an employee's age and years of service total 45, and the employee has at least 5 years of service, then 50% of the benefits must be vested, with at least 10% vesting for each year thereafter.

Note

For plans subject to collective bargaining agreements, the effective date is the earlier of the date on which the last collective bargaining agreement under which the plan is maintained terminates or --

* 01/01/99
** 01/01/89

Action Items

• Find out if you are covered by an employer plan.
• Find out how soon you can start participating in and/or contributing to your retirement plan after you start working for a company.
• Get a Summary Plan Description.
• Review your plan document or Summary Plan Description to understand how you earn benefits in your plan.
• Find your plan's vesting schedule to check when you are fully vested. If you are thinking of changing jobs, check your plan to see if working longer will allow you to vest more fully in your employer's contributions.

This guide concerns U.S. workplace benefits and the federal rules described by the Department of Labor. The type of plan, its governing documents, and the facts of a claim matter. Government, church, and other excluded plans may follow different rules.

Source and scope

What You Should Know About Your Retirement Plan — U.S. Department of Labor. Accessed October 28, 2026. This public domain federal guidance is an educational reference; use the source publication and the applicable plan or employment documents for the full context and later updates. Fynoptic is independent and is not endorsed by the Department of Labor.