VESTING RULES FOR COMPANY PLANS

By Ian Berger, JD
IRA Analyst
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If you’re thinking about leaving your job, you may want to inquire about your company retirement plan’s vesting schedule. If you are close to becoming vested in a retirement benefit, it may pay to stick it out until you have enough service to become vested. Otherwise, you may lose out on a valuable benefit.

Being fully vested in your benefit means that you have earned a benefit that cannot be taken away from you. If you are partially vested, you will receive only a portion of your benefit. If you are 0% vested, you will receive no benefit at all. The unvested portion of your benefit will be forfeited in the case of a partially-vested or 0%-vested benefit.

Defined contribution plans.

• Employee contributions (pre-tax deferrals, Roth contributions and after-tax contributions), and earnings on those contributions, are immediately 100% vested.
   
• Employer contributions, and associated earnings, are vested depending on the type of plan. Employer contributions made to SEP and SIMPLE IRA’s are immediately 100% vested. Employer contributions to 401(k) or 403(b) plans (including matching contributions) can be immediately 100% vested or subject to a vesting schedule.
   
• If your plan uses a vesting schedule, you will be credited with a year of vesting service under the plan’s rules (generally, if you work at least 1,000 hours in a 12-month period). A vesting schedule can be either “cliff vesting” or “graded vesting,” as follows:

     Years of Service                    Cliff Vesting                       Graded Vesting

               1                                         0%                                        0%

               2                                         0                                          20

               3                                      100                                         40

               4                                      100                                         60

               5                                      100                                         80

               6                                      100                                       100

Example: Suppose Anna participates in a 401(k) plan with a graded vesting schedule for employer contributions. She leaves her employer after four years of service and with $15,000 in her elective deferral sub-account and $4,000 in her employer contribution sub-account. She will receive a total distribution of $17,400, which represents her full elective deferral sub-account ($15,000) and 60% of her employer contribution sub-account ($2,400). The unvested portion of her employer contribution sub-account ($1,600) will be forfeited.

Defined benefit plans. Most defined benefit plans use a 5-year cliff vesting schedule under which benefits become 100% vested after five years of service.

Full vesting required. Benefits must become 100% vested, regardless of your years of service, when you reach the plan’s “normal retirement age” (typically age 65) or when the plan terminates. Many plans also provide for 100% vesting if you die or become disabled.

IRAs. Vesting rules don’t apply to IRAs. You are always entitled to receive the full value of your IRA.