Retirement Plan Vesting Schedule

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What Does It Mean for a Retirement Plan to "Vest"?

When an employee’s retirement plan vests, then the employee is able to receive your retirement benefits when he or she leaves the company. If a retirement or pension plan has only partially vested, then the employee is only able to receive the percentage that has vested.

Employer-Sponsored Retirement Plans and ERISA

While an employer is not required to provide a pension plan, if he chooses to do so, then the Employee Retirement Income Security Act (ERISA) establishes rules that must be followed by private employers.

ERISA regulates the vesting of an employee’s rights to his or retirement benefits in all employer-sponsored plans. For example, EIRSA provides standards as to:

What Rules Apply to Retirement Benefits Vesting?

The rules concerning retirement benefits often depend upon the type of the employer-sponsored retirement plan you have. However, the following rules generally apply:

How Does Vesting Work in a Defined Benefit Plan?

In a defined benefit plan, benefits may vest either through the so-called "cliff vesting" or through "graduated vesting." Employers usually have a choice as to the type of the vesting schedule.

Cliff vesting – in this type of vesting arrangement, an employee becomes 100% vested in employer-funded benefits after 5 years of work

Graduated vesting – here an employer develops a schedule for the gradual vesting of employee’s rights based on an employee’s years in service. The schedule is given below.

After 7 years, employee becomes 100% vested

Note that the defined benefit plans may provide for vesting schedules that are more favorable to employees.

How Vesting Works in a Defined Contribution Plan?

Defined contribution plans may consist of two types of contributions: an employee’s contributions as well as contributions made by the employer. In such situations, the employer usually matches a certain percentage of the employee’s contributions to the plan. Different vesting schedules apply to the employee’s contributions and the employer’s "matching" contributions.

1) Defined Contribution Plan: Employee’s Own Contributions

Employees who participate in defined contributions plans become 100% vested in their own contributions immediately. Once employee’s contributions become vested, they cannot be forfeited. However, employer’s vested contributions cannot be taken out immediately.

2) Defined Contribution Plan: Employer’s Matched Contributions

It’s worth noting that under some defined contributions plans, employees becomes immediately vested in their employers’ contributions. However, in a typical defined contributions plan, there are again two possibilities – the cliff vesting and the graduated vesting.

Note that different vesting rules may apply depending on the specific defined contribution plan involved, as well as the time when contributions were first made.

Seeking Help from an Attorney

When it comes to vesting of retirement benefits, the regulations may be complex and your situation is likely to have several nuances. Therefore, it is necessary to seek help from a qualified pensions and benefits attorney if you have questions about the eligibility, vesting, and accrual of your retirement benefits.

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Last Modified: 12-04-2013 11:18 AM PST

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