Can an Employer Hold Onto My 401(k) for a Year?

One of the advantages to having a 401(k) plan through your employer for your retirement savings is that your employer can make tax-deferred contributions on your behalf. However, your employer may be able to hold on to these contributions if you leave the company before a year -- or longer -- has passed.

Rules and Limits

You always maintain full ownership of your contributions you made to your 401(k) plan, and your employer may not withhold them if you leave the company. However, the Internal Revenue Service has rules that may limit when you can withdraw the money from your 401(k) plan. Unless you are 59 1/2 years old, no longer working for the employer with which you have your 401(k) plan, permanently disabled or suffering a severe financial hardship, you cannot take out any money.

Employer-Contribution Vesting

Your employer can, however, hold the contributions it makes to your 401(k) plan for more than a year before vesting you in them. Being "vested" in the amount means that if you leave the company, you get to take the money with you. Many employers require a vesting period for their employees to encourage them to remain with the company rather than moving on to other job opportunities shortly after starting.

Vesting Methods

The IRS sets two minimum vesting requirements that employers must meet or exceed. The first, cliff vesting, requires that employees be fully vested after three years, but does not require any partial vesting until that point. The graded-vesting method requires employees to be vested by at least 20 percent after two years and then gain an additional 20 percent after each additional year, making employees fully vested after no more than six years. Employers are also free to use a vesting plan that makes employees fully vested faster than these minimums.

Calculating How Much Your Employer Can Hold

To figure out how much your employer can hold back if you leave your job, first subtract your contributions and the earnings on your contributions. Next, subtract your percentage vesting in your employer contributions from 100 percent to find the unvested portion of your account. For example, if you are 60 percent vested, subtract 60 from 100 to find that 40 percent of your account is unvested. Multiply the unvested portion by the remainder to find the amount your employer would keep. In this example, if your account holds $10,000 of employer contributions and you are 60 percent vested, your employer would hold $4,000.