Cliff Vesting

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DEFINITION of 'Cliff Vesting'

The process by which employees earn the right to receive full benefits from the employee's qualified retirement plan account at a specified date, rather than becoming vested gradually over a given period of time. Cliff vesting happens when employees are considered vested in an employer benefits plan once they have earned the right to receive plan benefits. Vesting can occur gradually, where the employee becomes partially vested after each X years of service. For example, the employee could be 20% vested after two years of employment, 30% vested after three years of employment and so on until becoming fully vesting.

BREAKING DOWN 'Cliff Vesting'

An example of cliff vesting is when an employee becomes fully vested after five years of full-time employment. The vesting schedule for the employers' contribution to private retirement plans is mandated by the federal government. Employers may use vesting schedules in an attempt to retain talent and reduce attrition costs. Employees who leave a job often lose all the benefits that were not yet vested at the time of departure, so the employees may be incentivized to remain with the company longer to receive all benefits.

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