Vesting: A Look at Retirement Plan Ownership

Vesting, or being vested, refers to the amount of a retirement account that a participant owns. This is the amount that will be distributed to the participant upon the occurrence of a distributable event (i.e. retirement or another event deemed allowable by the Internal Revenue Code (IRC) or Employee Retirement Income Security Act (ERISA)). Since vesting follows a predetermined and agreed upon schedule, all distributable events take place inside the vesting schedule, with non-vested money being forfeited. 


The vesting schedule is laid out in the plan document and is typically set up to display the number of years of service in one column with corresponding vesting percentages in the adjacent column.  A common vesting schedule is aptly named the six-year graded (or 2/20) vesting schedule:


Years of Service

Vested %

Less than 2










6 or more




Another common vesting schedule is called the three-year cliff vesting schedule:


Years of Service

Vested %

Less than 3


3 or more



The graded schedule allows participants to gradually earn more of their accounts with each year they work for the employer; whereas the cliff vesting schedule gives participants ownership of the whole of their accounts when they meet the three-year threshold. Calculating the vested amount of a participant’s account can be done by multiplying the account balance by the appropriate vesting percentage for the participant’s credited years of service.  A common definition in the plan document for a “Year of Service” is a plan year in which the participant is credited with at least 1,000 hours of service. There may be specific years that can be excluded when determining a participant’s vested years of service. Any years that are excluded will be expressly defined in the document, namely the vesting section or in the definitions section tied to the description of Year(s) of Service.


Not all contributions to a retirement plan are subject to a vesting schedule. Under IRC and ERISA, a plan document may contain multiple vesting schedules to address the various contributions being made to the plan by employers and employees. There are distinct contribution types that must be 100% vested upon immediate deposit to the retirement plan: pre-tax elective contributions, designated Roth contributions, rollover contributions, Safe Harbor contributions (both non-elective and matching), Qualified Non-Elective Contributions and after-tax employee contributions. Per IRC and ERISA, all employer contributions to a defined contribution plan must vest at least as rapidly as either a six-year graded schedule or a three-year cliff schedule. Employer contributions to defined benefit plans must vest at least as quickly as a seven-year graded schedule or a five-year cliff vesting schedule.


The six-year graded and three-year cliff vesting schedules define the maximum allowable time that an employer can make a participant wait to be fully vested in employer contributions. The employer can choose to create a custom vesting schedule as long as it is as generous in each defined year as a six-year graded or three-year cliff schedule would be. For example, a schedule where participants vest in increments of 25% after each year of service would be an allowable variation. An example of an alternative cliff schedule would be one that allows participants to become 100% vested after just two years of service.


The IRC and ERISA also dictate that full vesting must be assessed upon reaching Normal Retirement Age (NRA). For the purpose of vesting, NRA is defined as the earlier of (1) the time a plan participant attains Normal Retirement Age under the plan’s definition, or (2) the later of the time a plan participant attains age 65 and has 5 years of plan participation. This provision ensures that, at the time of retirement, any plan participants who may not have the required number of years of service will nevertheless become fully vested in all contribution types.


Vesting is applied to any and all distributions to calculate the amount the participant may receive; leaving any non-vested amounts to be forfeited and potentially reallocated to remaining participants or used to pay plan expenses or offset future employer contributions. Vesting will differ from plan to plan, so be sure to check the plan document to ensure you’re following the correct vesting schedule for each money type in the plan.

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