Vesting Periods
Mastering Contributions
Definition of The Term
Vesting is a crucial concept in understanding employer contributions to an employee's 401(k) retirement plan. It refers to the portion of employer contributions that the employee has the right to take with them if they leave the company. While the contributions that employees make to their 401(k) are always immediately theirs, employer contributions may follow a vesting schedule.
Key Points
Additional Resources + Information
Types of Vesting Schedules
Full Vesting
In a full vesting setup, the employer's contributions to the employee's 401(k) plan are the employee's to keep, regardless of the length of time they have been with the company. The day the contributions are deposited, they are considered fully vested.
Cliff Vesting Schedule
With cliff vesting, employer contributions are not owned by the employee until they reach a specific milestone, often marked by a number of years of service. Once this milestone is reached, the employee becomes 100% vested all at once, meaning they have full ownership of all employer contributions made up to that point.
Graded Vesting Schedule
A graded vesting schedule allows employees to gradually become vested in their employer contributions over time. For example, an employee might become 20% vested after the first year of service, with an additional 20% vesting each subsequent year until they are fully vested, typically after five years.
Cliff Vesting vs. Graded Vesting Schedules
| Years Employeed | Cliff Vesting | Graded Vesting |
|---|---|---|
| 1 | 0.00% | 0% |
| 2 | 0.00% | 20% |
| 3 | 100% | 40% |
| 4 | 100% | 60% |
| 5 | 100% | 80% |
| 6 | 100% | 100% |