Plan sponsors converting an existing 401(k) plan to Gusto Retirement can use this article to understand how vesting service is measured after conversion, why Gusto shortens vesting schedules for existing participants, and what that looks like for the 2 most common vesting schedules.
Gusto Retirement uses the elapsed time method to determine vesting service. A participant earns 1 year of vesting service for each 12-month period of employment completed, counted from their hire date to their anniversary date, and then each subsequent anniversary year. The number of hours worked in that period doesn’t affect vesting service — someone who works 10 hours a week earns vesting service at the same rate as someone who works 40.
Many plans use the hours of service method instead. Under that method, a participant earns 1 year of vesting service for each 12-month period in which they work at least 1,000 hours. That 12-month period can be defined in different ways, but it’s often either the plan year or the participant’s anniversary year.
Important: If your plan currently uses hours of service, the way vesting service is measured changes when you move to Gusto Retirement.
The 2 methods don’t simply favor one group over another — each is more generous in a different situation.
Under hours of service, a team member who works fewer than 1,000 hours in a plan year earns no vesting service for that year at all. Someone working 15 hours a week could stay employed for years without earning any credit toward vesting.
Under elapsed time, that same person earns a full year of vesting service for every 12-month period they stay employed. For part-time and variable-hour team members, elapsed time is the more generous method.
This is the difference that runs the other way, and it’s the reason Gusto adjusts your vesting schedule.
Under hours of service, the clock runs on the plan year, not the hire date. A team member hired mid-year who completes 1,000 hours before the plan year ends earns a full year of vesting service in less than 12 months. Under elapsed time, that same person must be employed a full 12 months to earn that year.
Because of this, a participant can arrive at Gusto with 1 more year of vesting service credit than elapsed time alone would have given them.
IRS rules don’t allow a plan amendment to reduce a participant’s already-accrued vested percentage. If Gusto switched your plan to elapsed time and kept your current vesting schedule unchanged, some participants would be less vested the day after conversion than the day before — which isn’t permitted.
For a participant with a single, continuous period of employment, the gap between the 2 methods never grows past 1 year. That gap comes from the partial period at the start of employment; once it passes, both methods add 1 year of service at the same pace.
To account for this, Gusto shortens the vesting schedule by 1 year for everyone who is already a participant when your plan converts. A 6-year graded schedule becomes a 5-year graded schedule. A 3-year cliff schedule becomes a 2-year cliff schedule.
The result: every existing participant is at least as vested at every point in time as they would have been under your plan’s previous vesting provisions. Many are more vested, and sooner.
Note: The shortened schedule protects the vested percentage, not the count of years. A participant may show fewer years of vesting service at Gusto than they did under your old plan and still be vested in the same amount or more. The examples below show how this works.
Your plan carries 2 vesting schedules after conversion, though you won’t see this distinction on your dashboard. Which schedule applies depends on whether the participant entered the plan before or after your conversion date.
Participants who joined before conversion follow the shortened schedule, measured under elapsed time from their original hire date. Their service with you from before the conversion counts.
Participants who join after conversion follow your plan’s original schedule, also measured under elapsed time. They have no earlier hours-of-service credit to protect, so there’s nothing to make up for.
This means 2 team members with the same length of service can have different vested percentages if one joined before your conversion to Gusto and the other joined after. That’s expected, and it’s allowed under the law — it’s simply the result of protecting the earlier group.
Under a 3-year cliff schedule, a participant is 0% vested until they reach 3 years of vesting service, then jumps to 100%. For your existing participants, this becomes a 2-year cliff schedule at Gusto.
This example uses the following facts: Rory is hired on July 1, 2025. Your plan year is the calendar year, your plan uses hours of service, and Rory works more than 1,000 hours every plan year. Your plan converts to Gusto Retirement on January 1, 2026.
Date
Your current plan (3-year cliff)
Gusto (2-year cliff)
Dec 31, 2025
1 year of service, 0% vested
0 years of service, 0% vested
Jun 30, 2026
1 year of service, 0% vested
1 year of service, 0% vested
Dec 31, 2026
2 years of service, 0% vested
1 year of service, 0% vested
Jun 30, 2027
2 years of service, 0% vested
2 years of service, 100% vested
Dec 31, 2027 (or when 1,000 hours is reached)
3 years of service, 100% vested
2 years of service, 100% vested
Rory reaches full vesting on June 30, 2027, at Gusto — 6 months earlier than under your current plan. Notice the first row: on Dec 31, 2025, Rory has 1 year of credited service under your plan and 0 years at Gusto, but is 0% vested either way, so nothing was taken away.
Under a 6-year graded schedule, a participant vests 20% at 2 years of service and 20% more each year after that, reaching 100% at 6 years. For your existing participants, this becomes a 5-year graded schedule at Gusto, which starts at 20% after 1 year of service and reaches 100% at 5 years.
River is hired on July 1, 2025. Your plan year is the calendar year, River works more than 1,000 hours every year, and your plan converts on January 1, 2026.
Date
Your current plan (6-year graded)
Gusto (5-year graded)
Dec 31, 2025
1 year of service, 0% vested
0 years of service, 0% vested
Jun 30, 2026
1 year of service, 0% vested
1 year of service, 20% vested
Dec 31, 2026
2 years of service, 20% vested
1 year of service, 20% vested
Jun 30, 2027
2 years of service, 20% vested
2 years of service, 40% vested
Dec 31, 2027
3 years of service, 40% vested
2 years of service, 40% vested
Jun 30, 2028
3 years of service, 40% vested
3 years of service, 60% vested
Dec 31, 2028
4 years of service, 60% vested
3 years of service, 60% vested
The pattern continues the same way. River reaches 100% on June 30, 2030 — 6 months earlier than the Dec 31, 2030 date under your current plan. At every point on the calendar, River is either equal to or ahead of where your current schedule would have put them.
The 1-year adjustment works when your current plan credits 1 year of vesting service for completing 1,000 hours in a 12-month period — the most common design. Tell Gusto before your conversion date if any of the following apply to your plan:
Your plan credits a year of vesting service for fewer than 1,000 hours, or uses an equivalency method like days, weeks, or months worked
Your vesting computation period is something other than your plan year
Your plan has rehired participants whose earlier service counts toward vesting
Your vesting schedule isn’t a standard cliff or graded schedule
Your plan covers more than one entity in a related employer group
Pro tip: Gusto reviews your current plan documents before your conversion date, so most of these come up on their own. Let Gusto know anyway if you already know one applies to you — it helps set up your vesting schedule correctly the first time.
This information is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax, legal and/or financial advice that considers all relevant facts and circumstances. You are advised to consult a qualified financial adviser or tax professional before relying on the information provided herein.