401k Vesting Requirements

[daj24601]

What is the name of your state? Currently live in Utah, employer is in Kansas.

I have an interesting question about 401k vesting. My wife worked for a Doctor’s office for approximately 2 years. During that time, she acquired a couple thousand dollars in her 401k. We moved, had the account rolled over, only to find out that her employer kept nearly 70% of the funds. The claim, and the math looks legitimate, that they kept only their contributions since my wife was there for the six required years for vesting. My wife couldn’t find anything regarding 401k vesting in her employee manual, and can only remember a manager telling her vesting occurs after 500 hours.

1) Is there a limit on how long employers can require for full vesting?
2) 2) How must, if at all, the employer inform of the vesting period?

Any other thoughts might be helpful. Thanks.

 

[moburkes]

What is the name of your state? Currently live in Utah, employer is in Kansas.

I have an interesting question about 401k vesting. My wife worked for a Doctor’s office for approximately 2 years. During that time, she acquired a couple thousand dollars in her 401k. We moved, had the account rolled over, only to find out that her employer kept nearly 70% of the funds. The claim, and the math looks legitimate, that they kept only their contributions since my wife was there for the six required years for vesting. My wife couldn’t find anything regarding 401k vesting in her employee manual, and can only remember a manager telling her vesting occurs after 500 hours.

1) Is there a limit on how long employers can require for full vesting?
2) 2) How must, if at all, the employer inform of the vesting period?

Any other thoughts might be helpful. Thanks.

Huh? She worked there 2 years AND 6 years? Yes, they are allowed to keep their contributions. Did you call the company and ask? You'll need to clarify on the length of time she was there.

 

[daj24601]

Sorry. She was there 2 years. They are now telling her she needed to be there six years for the contributions by the employer to vest (I was in a hurry writing that).

It is unclear if they told her about the six year requirement up front or while she was there, or if they just recently came up with the time requirement. There is nothing in her old employee manuals about the vesting requirements.

 

[cbg]

There are several different legal methods of vesting. Without knowing which one is in the official plan document, it's hard to comment.

The one thing I can tell you is that any contributions SHE put in are ALWAYS 100% vested. She CANNOT lose any contributions that SHE made. Contributions that the employer put in can be vested, as I said, in a number of different ways, all legal.

Edited for clarity: That is not to say that no matter what method the employer uses, it is legal - just that there are a number of different legal ways.

 

[Some Random Guy]

Usually 401K vesting schedules are not found in the employee handbook. They are usually sent out in the 401K manual that you get from the administrator of the 401K plan. Companies normally hand these out when you are first enrolled.

Also, if you look at your quarterly statements from the 401K, you will likely see a vesting percentage or breakdown of vested and non-vested money.

 

[cbg]

Excellent points by SRG.

 

[daj24601]

So it sounds like there is nothing I can do. I gather an employer sets the time for vesting of employer contributions when he/she establishes the benefit.

So what if an employer sets one year as the vesting period, an employee works 2 years, and after the employee quits but before rolling over the funds, the employer validly changes the vesting period to 6 years? Which period controls?

 

[moburkes]

The one that was in place at the time of termination. I'm not sure why you believe that her employer is trying to fraudulently keep their money.

 

[cbg]

There will be language in the plan document which addresses this.

I think you don't understand that a 401k is very heavily regulated. The employer can't arbitrarily make changes. There is a plan document which controls all of these questions. That document is not the employee handbook.

YOU cannot do anything. Your wife can ask for a copy of the plan document, and under the law they must provide it. When she receives it, if there is anything she still doesn't understand, we will be better able to provide answers since she (or you) will be able to give us the appropriate language from the actual plan. Until then, we're only guessing.

 

[daj24601]

The plan document. I will have her request it today.

Why do I think she is trying to take this money? Long story, but I will just say she has tried to do it to prior employees. Without giving specifics, this employer (she is the sole proprietor of I think an LLC, it is a medical clinic) fraudulently tried to retain a contractual bonus when another employee quit. She does anything to save a buck. She probably thinks this is too small of an amount for us to really put up a fight over, and could fund another European trip for her.

Anyway, I am not certain she is trying to screw us out of the money, but I am very suspicious she is. Getting the plan document is a great step to find out.

So, my wife requests the plan document from the employer or from the financial institution controlling the employer's benefit program? Also, if we requested the plan document from when my wife quit, would they have to provide it.

Thanks for all your help. I just want to find out if there is anything worth fighting for before I hire an attorney.

 

[moburkes]

A bonus is something different, as most states don't require bonuses to be paid upon termination. However, your wife should also have a copy of the plan documents. But, yes, request a copy.

 

[cbg]

Start with the employer. The one in place at the time she quit is the one that's going to control.

 

[chitown]

There are two different methods of vesting an employer can choose and both MUST be contained in the plan summary and plan document which are REQUIRED to be provided to the employee upon hire. Most employers will have an employee sign a statement verifying the documents were provided and also read. Plan summary and any amendments to the plan are required at least annually or upon employee request. Statements of employer (if any) and employee accounts for the beneficial interest of the employee must be provided at least annually and greater frequency is encouraged (most employers provide quarterly).

Two methods of vesting are: Step and Cliff Vesting with a maximum time allowed until full (100%) vesting in employer contributions account, required to be maintained under employees name, of 5 years. Step vesting involves an incremental % vesting each year until 100% is reached such as 1 yr of employment = 20%, 2 yrs = 40%, etc (hence the label "step", as you step up in vested % each year in the employer contributions account in your name). Cliff vesting is as the name applies, you are not vested at all until the end of the 5th year of employment which at that time you will fall off the cliff and become 100% vested in any and all employer contributions. Cliff vesting method not looked upon highly by ERISA and/or the IRS regulations and related sections 400 of the code. Believe method is not available to new plans currently, but older, pre-established plans were grandfathered and not subject retroactively to any amendments of the law. (Might be wrong with the law change, but the two vesting methods detailed are correct.)

As a former plan participant you have the right to request and receive a current plan description, summary and document.

 

[daj24601]

Great advice, and thank you for the explanation Chitown. She requested the documents, and now we just wait. I figure I will give them about a week and I will request them again. I will let you know what I find out. Really, I am hoping that the docs show a five year cliff vesting so I don't have to take any action against the employer.

I will update when I know more. Thanks again.

 

[cbg]

Five year cliff vesting is quite common.

Just one thing; YOU do not have any standing to take any action against the employer. Only your wife does.