![]() ![]() An employer may choose a more favorable cliff vesting schedule, such as a two-year cliff. It means that an employee must be 100 percent vested after attaining three years of vesting service. A three-year cliff vesting schedule is the least generous, or maximum, schedule length allowed under a cliff vesting schedule. Under this approach, an employee remains zero percent vested until he obtains a plan-defined number of years of vesting service, at which point he will become 100 percent vested. Alternative vesting schedules need not have identical increases for each year of vesting service accrued but must meet the minimums just described. For example, an employer may not use a graded vesting schedule where an employee is only 40 percent vested in year four the employee must be at least 60 percent vested in year four. The six-year numbers previously mentioned are the minimum that an employee must be credited with for those years of service. ![]() That means that at one year of vesting service, an employee is zero percent vested, then must gain 20 percent vesting with each additional year of vesting service he obtains: two years = 20% three years = 40% four years = 60%, five years = 80%, and six years = 100%.Īn employer may choose to follow a more favorable graded vesting schedule, such as a four-year graded vesting schedule of 25 percent increases each year until 100 percent vested at year four. A six-year graded vesting schedule is the least generous, or maximum, schedule length allowed under a graded vesting schedule. Under this vesting schedule, an employee’s vesting percentage gradually increases on an annual basis as she accrues each additional year of vesting service. ![]() Three types of vesting schedules are permitted in defined contribution retirement plans. If allowed in the plan document, participants may become 100 percent vested due to such events as death, disability, or attainment of early retirement age. Finally, when participants attain normal retirement age as defined in the plan document, they must become 100 percent vested.Ī participant may also become 100 percent vested because of plan design. If there’s a complete discontinuance of contributions to the plan-which is based on facts and circumstances-or if the plan amends to become a frozen plan, all participants must be 100 percent vested. Under full plan termination, all participants must be 100 percent vested. Upon partial plan termination-which can occur when a significant number of employee layoffs or terminations occurs-the affected participants must be 100 percent vested. First, nonsafe harbor matching and profit sharing contributions must be 100 percent vested if an employer requires two years of service prior to an employee becoming eligible for those contribution types under the plan. ![]() Money types that may be subject to a vesting schedule include nonsafe harbor matching contributions, profit sharing contributions, actual contribution percentage (ACP) safe harbor contributions, qualified automatic contribution arrangement (QACA) ADP safe harbor contributions, and QACA ACP safe harbor contributions.Ĭertain events require a participant to be 100 percent vested. This includes employee contributions (pretax deferrals, Roth deferrals, and nondeductible after-tax contributions), rollover contributions, actual deferral percentage (ADP) safe harbor contributions, qualified nonelective and qualified matching contributions, and SIMPLE 401(k) contributions. How is vesting applied in defined contribution retirement plans?Ĭertain money types must be 100 percent vested. When distributions are taken from the plan, plan administrators can determine how many years of vesting service a participant has and, therefore, what percentage of certain employer contributions are truly owed to a participant and what percentage could be forfeited back to the plan. “Vesting” is the process by which certain employer contributions to a defined contribution retirement plan become nonforfeitable to plan participants. By Luke Swanson, QKA, CIP What is vesting as it relates to a defined contribution retirement plan? ![]()
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