Vesting

6 year graded vesting schedule chartBenefits accumulated in a retirement plan on behalf of employees may be subject to a vesting schedule. Vesting occurs as the ownership of retirement plan dollars transfers to the employee based on their years of service.

It is important to note that elective deferrals are always 100% vested.

An example of a common vesting schedule is a 6-year graded schedule, where the employee accumulates an additional 20% ownership of the money for each year of service after year one.

6-year graded schedule:

Years of Service Vested Percentage
0 0%
1 0%
2 20%
3 40%
4 60%
5 80%
6 100%

 

Another commonly used vesting schedule is a 3-year cliff schedule:

Years of Service Vested Percentage
0 0%
1 0%
2 0%
3 100%

 

Defined contribution plans allow for any vesting schedule that is no less generous than either a 6-year graded or a 3-year cliff schedule.

Traditional defined benefit plans may allow for any vesting schedule no less generous than either a 7-year graded or a 5-year cliff schedule. Top heavy defined benefit plans are subject to the same vesting requirements as defined contribution plans.

Cash balance defined benefit plans require 100% vesting after 3 years.

If a retirement plan requires more than 12 months of service to become an eligible employee (this is not permitted in 401(k) plans), the benefits must be immediately 100% vested.

Certain years may be excluded for vesting purposes:

  • Years of service prior to age 18
  • Years during which the employer did not maintain the plan (or a predecessor plan)

See Plan Forfeitures – Anticipating Their Utilization to see how to properly handle non-vested dollars.


Contact Pinnacle Plan Design

Pinnacle Plan Design is a third-party administrator (TPA) of employer-sponsored qualified retirement plans. We specialize in retirement plan design, administration and actuarial consulting. Pinnacle has offices in Tucson and Phoenix, Arizona (AZ) as well as Houston, Texas (TX), and we proudly serve clients nationwide.

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