Whether you’re starting a new job or want to know when you can expect to receive certain benefits, you’ll need to understand your employer’s vesting schedule. This program involves assets and benefits that you will be able to access according to a certain timetable. So, how exactly does a vesting schedule work? And when can you expect to be fully vested?
Meant to incentivize employees to stay with their employer longterm, a vesting schedule is a program involving assets such as retirement or stock option plans. Until the employee is fully vested, she does not actually own the funds, despite the fact that she may see them in her bank account. When the employee is “fully vested,” she is entitled to take the benefits with her when she leaves the company, whether voluntarily or involuntarily.
If, however, you’re not 100% vested — meaning the vesting period, the time before the employee owns the benefits or funds — when you leave the employer, you risk forfeiting them. Your employee will make contributions according to a vesting schedule to encourage you to stay.
Many employers match your individual contributions to your 401k. However, these employer contributions may vest according to a schedule, enabling you to take a certain percentage for each year or period of time you remain at the company. If you don’t remain with the employer for the length of time it takes to fully vest their contributions (depending on the company, often several years), you will only be able to take a portion or none of the contributions.
An HR representative or the person in charge of benefits at your employer can fill you in on what your company’s vesting schedule is and how long it will take for you to be fully vested in your 401k. Keep in mind that no matter what, you are entitled to the full amount of your individual contributions to your retirement plan.
Vesting periods can vary significantly. Some employers offer immediate vesting for employer matches, although this is less common. More often, to be fully vested in your 401k, you must remain at the company for several years, usually around five. Until that point, you may not receive any of your employer’s match if you leave; however, some employers will allow you to take a portion of the funds (see more on graded vesting schedules below).
If you are vested after five years, it means that your employer requires you to remain at the company for five years to be fully vested in your benefits or stock options. Essentially, if this is the vesting period your company has laid out, then you will be able to take the full amount of the funds with you if you leave the company at this time; otherwise, you will forfeit some or all of them.
There are three main types of vesting schedules for retirement accounts:
• Immediate vesting
If your employer offers immediate vesting, it means that you will receive all of the benefits your employer is giving you immediately.
• Graded vesting
Through graded vesting, you will receive incremental percentages of ownership of your employer’s contributions. Often, the percentages increase each year or period. For example, if your employer has a graded vesting schedule that will enable you to be fully vested after five years, you may receive 20 percent the first year, and then another 20 percent the following year (for a total of 40 percent), and so on, until you are fully vested at five years.
Keep in mind that there is a federally-mandated maximum of six years for graded vesting schedules.
• Cliff vesting
Under a cliff vesting plan, you will not be entitled to any ownership of your benefits or funds until a certain period of time has passed. Instead, you will receive ownership in one lump sum, so if you leave before the vesting period has expired, you will not be entitled to any of the benefits.
Under federal law, the maximum length of time for cliff vesting schedules for qualified retirement plans is three years.
Also known as a pension plan, a defined benefit plan is a fixed-benefit retirement plan. Employers establish an amount of money employees will receive when they retire according to a formula based on length of employment and salary history, along with other factors on occasion. The idea is to provide employees with financial security upon retirement.
Circumstances under which benefits become fully vested include:
• The employee has worked the number of years necessary to receive full benefits.
• The benefits plan is terminated by the employer.
• The employee reaches the age of retirement prior to the end of the vesting schedule.
Additionally, contributions to some retirement plans, such as qualified matching contributions to a 401(k) plan and all contributions to SEP, SARSEP, and SIMPLE IRAs, are fully vested immediately.
Some companies offer stock options to employees, enabling them to buy stock in the company at a fixed price no matter what the market value of it is at the time. Stock options can follow cliff or graded vesting plans. In a graded plan, employees can buy a certain amount of shares at a given until they are fully vested at, say, five years. According to a cliff plan, employees receive options at the same time and must remain with the employer for a certain period of time, such as one year, before they are able to buy shares.
While graded vesting, as described above, enables employees to receive equal shares of their benefits at given times, class year vesting treats the deferrals from each calendar year differently, such that each year’s benefits are subject to their own vesting schedules. For example, if your employer has a class year schedule of 20 percent each year, every percentage you receive at a given time would have an individual vesting schedule, thereby treating each employer contributor as a distinct entity.
Through accelerated vesting, benefits or funds become 100 percent vested before the vesting schedule has expired. Some circumstances under which an employer might offer an accelerated schedule include:
• The company is sold or acquired.
• The company decides to go public.
• An employee dies.
Given that vesting schedules are meant to incentivize employees to stay with their employer, accelerated schedules can have drawbacks for companies. For the most part, employers offer accelerated vesting schedules to entice high-level employees to stay through transition periods, such as a merger, or similar circumstances.
Vesting schedules are a complex topic, and it’s important to understand how and when you’re receiving promised contributions for employers. Carefully review your company’s vesting schedule as laid out in your benefits information, and if you have questions about how the vesting schedule works, contact a representative who handles benefits for your employer.