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Setting up a Vesting Schedule for your 401K in California 

Employer matching contributions are not only a great way to attract and retain the best talent for your company, but they are also a great way for business owners to save on income taxes as well. 

If you’re considering a matching contribution for your employees who choose to participate in a 401k here are some things you’ll need to think about when it comes to vesting. 

Setting up your vesting schedule.

Setting up your vesting schedule means deciding how long your employees will wait before the matching contributions you make are 100% theirs. This is important from a talent acquisition and retention perspective because, although most people are honest, some would come for the benefits and leave quickly taking your money and their tax-free savings with them leaving you in the lurch twice over. 

What is a vesting schedule?

When you provide a 401k to your employees, you can choose to set up matching contributions.  When the employee contributes the maximum annual contribution amount to their Tax-free retirement savings account in the form of an employer-sponsored 401k.

Overall annual contributions to a 401(k), which includes employer contributions, is $61,000 for 2022. For people 50 and older, the limit goes up to $67,500, which includes the catch-up contributions. for 2022).

With a matching 401k, you, as the employer agree to contribute the same amount or some pre-defined percentage of the employee contribution to that employee’s 401k retirement account. This strategy is often a part of a tax-advantaged plan for both the owners and the employees because the employer writes that contribution off of their taxes, effectively providing a tax-sheltered way to offer an employee added benefits. Everybody wins. 

82% of employers that offer traditional 401(k) plans say they match a portion of their workers’ account contributions.


The money an employee contributes to his or her 401K is always 100% theirs and is a movable asset they can take with them when and if they leave your employ. However, the matching contributions you make as an employer remain your company’s assets until such time as that employee is vested, after which time those assets belong to them and can be taken with them if they leave. 

401k vesting schedules can be set up in three primary ways: 

Immediate, graded, and cliff. As you may imagine these have very different structures. 

Immediate vesting schedules are exactly what they sound like.  The employee has immediate ownership of the employer’s matching funds and can leave at any time with both their contribution and the funds contributed by the employer without restriction.  This type of plan relies on a strong hiring protocol to ensure employees are in it for the long haul 

Graded vesting gives proportions of the total employer contribution to the employee at timed intervals. For example, the employee may get 10% in year one, 40% in year two, and on until the employee is100% vested. 

Cliff vesting requires the employee to remain with the company for a set amount of time before receiving the matching contributions. The cliff, the time at which those matching contributions become the 100% property of the employee, can be set at no greater than 3 years.

As an employer, you must fully explain the vesting schedule in the 401K information packet given to employees upon setup of the retirement savings account. 

With Employer401K we can set your plan up to be tax-advantaged for you, great for your employees, and a tax-free benefit that can attract top talent to your organization. All business owners with greater than 5 employees will have to offer a 401k as of June 2022.