YOU ASK:

What is period of vesting?

WE ANSWER:

The vesting period is a schedule established by an employer and specified in the retirement program. It provides that an individual has to be employed by a company for a certain amount of time until the individual receives full rights over the benefits associated with the pension plan.

How Vesting Works

The percentage of ownership of the employer's contributions and the earnings under an employee retirement plan increases proportionately each year the employee is in service with the respective employer.

If the employees have stayed in service for the full vesting period, they are entitled to the retirement plan contributions and earnings even if they leave the job prior to retirement. Individuals can elect to roll over to a new retirement plan with their next employer, or make distributions or simply keep the retirement plan and continue making regular contributions to it.

If individuals have not stayed with the same employer for the time necessary to achieve complete vesting, their right to the earnings on the contributions will depend on the extent of vesting achieved. In such a case, employees can keep the contributions they made to the retirement program.

Different Periods of Vesting

The vesting period can vary from company to company and its length is determined at the discretion of every employer but it is nevertheless subject to federal regulations.

In many cases the vesting period starts upon employment, but some employers require that the employee's 90-day probation period expire before the vesting period begins. Other companies might wait until the employee has completed the first year of employment.

Employers typically choose between two vesting schedules:

  • If employers opt for the cliff vesting schedule, the employee is granted full vesting after three to five years of service. Under federal law, the maximum vesting period is limited to five years but there have been discussions in favor of reducing this period even further.
  • Under the graded vesting option, vesting can begin after two years of service and the rate of vesting increases at 20-percent incremental periods. Thus, if an employee stays with the company for three years, they will be 20% vested, if they stay in service for four years, they will achieve 40-percent vesting, and the required time for achieving full vesting will be 7 years.
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