Are You Vested?

What is a vesting schedule?

A vesting schedule is a way for your employer to give you some incentive to stay with them.

To be 100% vested means to be able to take all of your retirement benefits with you if you leave or have been fired.

Depending on what type of plan you have- pension or 401k- will determine your vesting schedule.

Let me make something clear.  What you contribute is always yours.  The vesting schedule pertains to what your employer contributes e.g.; the 401k match.   Here’s a look at the two different vesting schedules:

Defined Benefit (Pension) Plan

Pension plans are a dying breed but some people still have them.  Defined benefit plan must vest at least rapidly as one of the following two schedules, assuming the plan is not top-heavy. Top-heavy has to do with making sure that each employee receives a fair share of retirement benefit as it relates to their salary.

1. Five-year cliff vesting, no vesting is required before five years of service.  100% vesting is required at five years of service.  Referred to as a five-year cliff.
2. Three to seven-year graduated or graded vesting.  The plan must provide vesting that is at least as fast as the following schedule:

So in the example above, if the employer uses the graded vesting schedule and you have been employed for 5 years, then you’ll be able to take 60% of the employer’s benefit with you.

At my previous firm, I was offered a small retention package to stay (not nearly what the boys at Merrill got) and it had a 7 year vest attached to it.  Needless to say, I gave it up and started my own firm.

401k Vesting Schedules

Defined contribution plans must vest at least as rapidly as one of the following two schedules  for all employers non-elected contributions and matching contributions:

1. Three-year cliff vesting.  No vesting is required before three years of service, 100% vesting is required upon the completion of three years of service.
2. Two to six-year graduated or graded vesting.

The plan must provide vesting at least as fast as the following schedule.  Note: These are the same vesting schedules used to top-heavy defined benefit plan.

The employer may choose a vesting schedule that is more favorable to the employee, but not less favorable than the cliff.

Example: ABC Company offers a 401(k) plan that has an employer match.  The company has the following vesting schedule with respect to matching contributions: 25% vested after one year, 50% vested after two years, and 100% vested after three years.

Although the vesting schedule does not exactly match the vesting schedules posted above, it is acceptable because it’s more favorable to the employees than the vesting schedule listed above.

All years of service must be counted with few exceptions.   Two of the more common exceptions are:

1. Years prior to the implementation of the plan.
2. Years prior to the age 18.

Both years prior to the implementation of the plan and years prior to age 18 may be considered at the choice of the employer, but it must be in the plan documents.

Employer contributions are 100% vested when:

• Plan termination.  Benefits become 100% vested in the event of a plan termination.
• SEP, SARSEP, and SIMPLE IRA’s. All contributions to these are fully vested.
• Attainment of normal retirement age. In the event of an employee attaining normal retirement
• Under a 401(k) plan, elected deferrals, qualified non-elected contributions, and qualified matching contributions are 100% vested at all times.
• Safe Harbor contribution is to a Safe Harbor 401(k) plan.
• Plan requires two years of service for eligibility.

It’s very important to understand your vesting schedules when you start with a new employer.  That could make the difference of walking with a good chunk towards your nest egg or walking away with nothing.  Be sure to check your benefits manual and ask your human resources department the right questions.