Graded Vesting

AAA

DEFINITION of 'Graded Vesting'

The process by which employees gain a certain percentage of irrevocable rights over employer contributions made to the employee's retirement plan account each year until the employee is fully vested. With graded vesting, an employee will become vested in at least 20% of their accrued benefits following an initial period of service, with an additional 20% in each following year until full vesting occurs. The initial period of service can vary depending on how the employer determines the amount of its contributions.

INVESTOPEDIA EXPLAINS 'Graded Vesting'

For example, if an employer's contribution is based on a fixed percentage of the employee's contribution, the initial period of service might be two years. After two years, the employee would be 20% vested, after three years, 40%, with the employee eventually becoming fully vested after six years. Graded vesting differs from cliff vesting where employees become immediately 100% vested following an initial period of service.

Employers must follow certain federal laws that determine the longest allowable vesting periods; however, they are able to choose shorter periods. In addition, if a plan is terminated, all participants become fully vested immediately.

RELATED TERMS
  1. Vesting

    The process by which employees accrue non-forfeitable rights ...
  2. Graduated Vesting

    The accelerated benefits employees receive as they increase the ...
  3. Qualified Retirement Plan

    A plan that meets requirements of the Internal Revenue Code and ...
  4. Accelerated Vesting

    A form of vesting that takes place at a faster rate than the ...
  5. Cliff Vesting

    The process by which employees earn the right to receive full ...
  6. 401(k) Plan

    A qualified plan established by employers to which eligible employees ...
RELATED FAQS
  1. Does my employer's matching contribution count towards the maximum I can contribute ...

    Contributions to 401(k) plans come from employee salary deferral and employer match dollars. According to the IRS, employees ... Read Full Answer >>
  2. How much will an employer generally contribute to a 401(a) plan?

    The amount an employer contributes to an employee's 401(a) retirement savings plan can vary from plan to plan. 401(a) plans ... Read Full Answer >>
  3. When can benefits be received from a provident fund?

    Like most retirement savings vehicles, participants in provident funds are eligible to receive benefits at retirement. However, ... Read Full Answer >>
  4. Is Social Security Income a perpetuity?

    Because Social Security income does not continue indefinitely, it cannot be classified as a perpetuity. What Is a Perpetuity? A ... Read Full Answer >>
  5. What types of investments are allowed in a provident fund?

    Different provident funds have different investment rules and restrictions. The allowable investments in an Indian provident ... Read Full Answer >>
  6. How does a provident fund compare to U.S. Social Security?

    A provident fund shares many attributes of the U.S. Social Security program, including government sponsorship and set contribution ... Read Full Answer >>
Related Articles
  1. Retirement

    Keeping Track Of Retirement Plan Assets

    Maintain records of your pension benefits or risk losing them.
  2. Taxes

    3 Retirement Account Rules To Know

    Stay up-to-date on regulation amendments to avoid penalties as well as take advantage of new opportunities.
  3. Entrepreneurship

    401(k) Plans For The Small Business Owner

    If you own a business, this may be the plan for you! Find out about its benefits and eligibility requirements.
  4. Taxes

    Learn about eligibility requirements, contributions and distribution rules for these retirement plans.
  5. Investing

    Why Cash is King When Markets are Volatile

    After the past several years, you might be addicted to equity. But when markets turn volatile, cash is the best option. Here's why.
  6. Professionals

    The Financial Advisory Business: More Women Wanted

    It's no secret that women are underrepresented in the financial advisory business. Here are some reasons why and what's being done about it.
  7. Professionals

    The Biggest Financial Mistakes Millennials Make

    Millennials are making financial mistakes that have the potential to cost them big over the course of their lives.
  8. Forex

    The Impact of 401(k) Outflows on Advisors

    The trend in the growth of assets in 401(k) plans has shifted as Baby Boomers retire, creating opportunities for financial advisors. Here's how.
  9. Professionals

    Top 10 Airlines to Work For in 2015

    Find out why Southwest Airlines and JetBlue lead the list of the top airlines to work for in 2015.
  10. Professionals

    Is Your Financial Advisor Looking Out for You?

    Financial advisors sometimes aren't looking out for clients' best interests. Regulators are scrutinizing their practices; investors should too.

You May Also Like

Hot Definitions
  1. Dog And Pony Show

    A colloquial term that generally refers to a presentation or seminar to market new products or services to potential buyers.
  2. Topless Meeting

    A meeting in which participants are not allowed to use laptops. A topless meeting organizer can also ban the use of smartphones, ...
  3. Hedging Transaction

    A type of transaction that limits investment risk with the use of derivatives, such as options and futures contracts. Hedging ...
  4. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  5. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  6. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!