Vesting is the process by which a participant's benefits become non-forfeitable; a vested balance represents the benefits a participant has earned the right to keep should they leave employment at any time. Vesting is one way to use your plan as an employee retention tool since you can create a schedule that rewards longevity with your company.
Employee contributions and rollovers into the plan are always fully vested, but employer contributions like matching and profit-sharing contributions may be subject to a vesting schedule.
What is a Vesting Schedule?
The vesting schedules are based on the number of years of vesting service an employee is credited. Note that as with eligibility, service with all related companies (dates of hire, hours of service, as applicable) must be reported to Vestwell to ensure vesting is accurately calculated on an ongoing basis.
At this time, only one vesting schedule may be elected across employer contribution types.
- 100% immediate
- 2 years Cliff - 0% vested until credited with 2 years of service (100% vested)
- 4 Year Graded - 25% each year starting with 1 year of service (100% at 4 years)
- 6 Year Graded - 20% each year starting with 2 years of service (100% at 6 years)
- 3-Year Cliff - 0% vested until credited with 3 years of service (100% vested)
- As needed, a schedule that aligns with a prior plan document (carry forward)
Vesting Recognition Options
Below are standard vesting recognition options supported by Vestwell’s bundled offering:
- Elapsed Time: An employee is credited with a year of vesting service on each anniversary of hire if employed; credit is generally recognized as if employed continuously if an employee terminates service and is subsequently rehired within 12 months.
- Hour-Based: Service is based on hours worked each plan year; an employee does not have to be employed on the last day of the year for service to be counted; a year of vesting service is credited as soon as an employee is recognized with 1,000 hours in a year.
If an actively employed individual passes away or becomes disabled, their employer benefits become immediately vested. Note that by statute, employees must be made 100% vested upon attainment of the plan’s Normal Retirement Age.
Recognition of service for vesting may be restricted to only such service after an employee turns age 18, and/or after the original effective date of the plan. By default, Vestwell does not apply these provisions. The downside for long-term employees is that they start earning vesting credit anew, not earning credit for their work history before the plan.
To learn more, visit your Plan Adoption Agreement Guide.