Retirement Plan Vesting Schedules – What is Vesting?

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by Stacey Spencer, QKA | Manager, Employee Benefit Services Group

Vesting is the non-forfeitable interest in the employer portion of your account. Your vested percent determines how much of the employer contributions you get to keep when you leave the company. It does not matter whether you terminated employment voluntarily, if you are fired or laid off.

Implementing a vesting schedule is a way for employers to reward loyalty. It provides an incentive for you to continue working there. In many instances, the more years you work, the more employer money you get to keep.
Remember that you are always 100% vested in any money you contribute directly to your own retirement plan. Your deferrals, adjusted for any investment gains or losses, are always 100% vested.

Your vested percent is typically determined by the number of years of service you have with your employer. The majority of plans require 1,000 hours in a year to receive credit for vesting. Some plans exclude certain years of service; such as, employment before the plan existed or before age 18. These restrictions are not common, but they are available.

Vesting requirements are often waived in the event of death, disability or when you reach normal retirement age. Note that the definition of disability can vary from plan to plan so be sure to check with your plan document or your employer’s Human Resources Department or Benefits expert regarding questions you may have. Vesting requirements are also waived if your employer decides to terminate the plan. In that case, you become 100% vested automatically.

Types of Vesting Schedules:

Immediate Vesting
Employer Contributions are 100% vested immediately upon deposit to the plan. Employer Safe Harbor contributions are required to be 100% vested.

Graded Vesting
A graded vesting schedule gradually increases vesting each until you reach 100%. Federal law sets a six-year maximum on graded vesting schedules in retirement plans. Here is a six year vesting schedule:

  • 1 year of service: 0% vested
  • 2 years of service: 20% vested
  • 3 years of service: 40% vested
  • 4 years of service: 60% vested
  • 5 years of service: 80% vested
  • 6 years of service: 100% vested

Cliff Vesting
A cliff vesting schedule is not gradual. You are suddenly 100% vested after a certain number of years (not to exceed 3 years). A Typical cliff vesting schedule looks like this:

  • 1 year of service: 0% vested
  • 2 years of service: 0% vested
  • 3 years of service: 100% vested

If your plan allows loans, Vesting affects how much you may borrow from the plan. Loans are limited to a maximum of $50,000 or half of your vested account balance.

It’s important to know the vesting rules for your plan before making a decision to leave your company. Since many of the vesting rules are specific to each plan, you should read your plan document or Summary Plan Description very carefully for vesting, as well as other key information regarding your plan.