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Qualified Plans:
What is Vesting?
Vesting is the process by which
the employee earns a non-forfeitable right to benefits funded by employer
contributions. All qualified plans must ensure that employees are vested in
employer contributions according to vesting schedules that meet regulatory
requirements. Employees are always 100-percent vested in their own contributions
(i.e. elective deferral contributions).
An employer may chose between two types of vesting schedules, which are the
cliff vesting and the graded vesting schedule.
An employer may
chose between two types of vesting schedules, which are the cliff vesting and
the graded vesting schedule.
Cliff Vesting
Of Regular Employer Contributions
Under a cliff-vesting schedule for employer contributions, such as
profit-sharing contributions, employee must perform five years of vesting
service to become vested in employer contributions. After this time the
employee becomes 100-percent vested in these contributions.
Of
Employer matching contributions
Under a cliff-vesting schedule for employer matching contributions, the
employee must perform three years of vesting service to become vested in
employer contributions. After the three years the employee becomes
100-percent vested in these contributions
Graded Vesting
Of Regular Employer Contributions
Under a graded vesting schedule for employer contributions, such as
profit-sharing contributions, employees are 20-percent vested in employer
contributions after completing three years of vesting service. For each
subsequent year, the vesting is increased by 20 percent until it reaches 100
percent, which occurs after the employee completes seven years of service.
Of Employer Matching Contributions
Under a graded vesting schedule for employer matching contributions, the
employee is 20-percent vested in employer contributions after completing two
years of vesting service. For each subsequent year, the vesting is increased
by 20 percent until it reaches 100 percent, which occurs after six years of
service.
The vesting schedules are summarized in the following tables.
An employer
may choose to have to have a faster vesting schedule. |
How Vesting Schedule Affects Employees' Assets
An employee who separates from service prior to becoming 100 percent vested will
forfeit the unvested portion of his/her account balance. The number of hours of
service performed by the employee determines the employee's vesting service for
each year. Generally, an employee who performs at least 1,000 hours of service
for a year is credited with one year of vesting service for that year. The
following example demonstrates:
Example 1:
The ABC Corporation profit-sharing contributions are subject to the following
graded schedule:
ABC
Corporation requires each employee to perform 1,000 hours each year in order to
be credited with one year of vesting service. Larry, a part-time employee whose
profit-sharing account has a balance of $5,400, performed the following hours of
service for these years:
Larry resigned
from ABC Corporation in January 2003. Even though he was employed with ABC
Corporation for five years, he is not fully vested in the profit-sharing
contributions because he did not work for at least 1,000 hours each year.
Because Larry is credited with three years of vesting services, he is entitled
to receive 60 percent of his account balance, which is $3,240
($5,400x.6=$3,240). Larry must forfeit the balance of $2,160.
Automatic
100-Percent Vesting
Employees are automatically 100-percent vested in some contributions such as
elective deferral (also referred to as salary deferral or salary reduction)
contributions. Also, some employers may prefer that the plan not have a vesting
schedule, which means that employees are immediately 100-percent vested in all
contributions. However, even for plans with a vesting schedule, there are the
following instances wherein employees without having met the vesting
requirements may become 100-percent vested in employer contributions:
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Distribution Rules
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