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 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

    The 401(k) and Qualified Plans Tutorial

    Learn about eligibility requirements, contribution to and distribution rules for these retirement plans.
  5. Professionals

    New 401(k) Pension Rollover Rule: Pros and Cons

    Is the new rule allowing participants to roll their 401(k) balances into pensions a good idea?
  6. Professionals

    Why Auto-Enrollment Will Save Your Retirement

    Savers need all the help they can get, even if it amounts to an offer they can't refuse. That's why the biggest improvement to 401(k)s is auto-enrollment.
  7. Professionals

    Retirement Planning Essentials for Your Clients

    You may have heard these retirement planning tips before, but has your client actually put them into action yet?
  8. Professionals

    Which Robo-Advisor is Right for You?

    Which robo-advisor is right for you? There are many factors to consider, including breadth of services, ease of use and cost.
  9. Investing Basics

    This Investment Strategy Could Be Your key To Success

    Goal-based investing seems like an obvious tactic. But many investors have only a vague idea what their goals are, much less how to achieve them.
  10. Taxes

    Before You Visit Your Tax Preparer: Do This

    The earlier you start preparing your tax records and documents, the more likely you are to have a smooth tax return experience – and all the tax benefits you're due.

You May Also Like

Hot Definitions
  1. Risk Averse

    A description of an investor who, when faced with two investments with a similar expected return (but different risks), will ...
  2. Fixed-Charge Coverage Ratio

    A ratio that indicates a firm's ability to satisfy fixed financing expenses, such as interest and leases. It is calculated ...
  3. Efficiency Ratio

    Ratios that are typically used to analyze how well a company uses its assets and liabilities internally. Efficiency Ratios ...
  4. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  5. Subsidy

    A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy ...
  6. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
Trading Center