Vesting
Vesting is the process by which an employee earns full ownership rights to employer-contributed retirement benefits over time, with employee contributions always being 100% vested immediately.
Exam Tip
Employee contributions = ALWAYS 100% vested. Max cliff = 3 years, max graded = 6 years.
What is Vesting?
Vesting determines how much of employer contributions you actually own.
Key Rules
| Contribution Type | Vesting |
|---|---|
| Employee Deferrals | Always 100% immediately |
| Safe Harbor | Must be 100% immediately |
| Employer Match | Subject to vesting schedule |
ERISA Maximums
- Cliff Vesting: 3 years maximum
- Graded Vesting: 6 years maximum
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Related Terms
Cliff Vesting
Cliff vesting is an all-or-nothing vesting schedule where employees become 100% vested after a specified period (typically 3 years for qualified plans), with no vesting before that point.
Graded Vesting
Graded vesting is a vesting schedule where employees gradually earn ownership over time, typically 20% per year starting in year 2, until reaching 100% after 6 years maximum.
401(k)
A 401(k) is an employer-sponsored retirement savings plan that allows employees to contribute pre-tax dollars, with potential employer matching, and tax-deferred growth until withdrawal.
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