Graded Vesting


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.

BREAKING DOWN '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.

  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 ...
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