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.
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:
- When an employee starts participating in the retirement plan.
- When an employee acquires non-forfeitable rights to benefits.
- When benefits may be affected by events such as termination in employment.
The rules concerning retirement benefits often depend upon the type of the employer-sponsored retirement plan you have. However, the following rules generally apply:
- Before rights vest, an employee may lose some retirement benefits for leaving the company.
- After rights vest, an employee leaving before retirement gets all vested benefits, although the value of vested benefits in a defined contribution plan may decline.
- Returning employees may count prior years of work towards benefits vesting (if the employ returns after less than five years).
- Military duty may be counted towards years of work necessary for vesting.
- Different rules apply to employees who left work prior to January 1, 1985.
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.
- In 3 years, the employee becomes at least 20% vested
- In 4 years, the employee becomes at least 40% vested
- In 5 years, the employee becomes at least 60% vested
- In 6 years, the employee becomes at least 80% vested
After 7 years, employee becomes 100% vested
Note that the defined benefit plans may provide for vesting schedules that are more favorable to employees.
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.
- Cliff Vesting – under this schedule, an employee becomes 100% vested in the employer’s contributions after 3 years of work.
- Graduated Vesting – here again there is a schedule of gradual vesting contingent on the employee’s years of work. In 2 years, an employee is at least 20% vested in employer’s contributions. After 6 years, an employee becomes 100% vested in employer’s contributions.
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.
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 employment attorney if you have questions about the eligibility, vesting, and accrual of your retirement benefits.