Vesting

AAA

DEFINITION of 'Vesting'

The process by which an employee accrues non-forfeitable rights over employer-provided stock incentives or employer contributions made to the employee's qualified retirement plan account or pension plan. Vesting gives an employee rights to employer-provided assets over time, which gives the employee an incentive to perform well and remain with the company. The vesting schedule set up by the company determines when the employee acquires full ownership of the asset. Generally, non-forfeitable rights accrue based on how long the employee has worked there. 

INVESTOPEDIA EXPLAINS 'Vesting'

The exact requirements for vesting are specified in the plan document, which also contains any applicable regulations. For example, an employee might receive 100 restricted stock units as part of an annual bonus. To entice this valued employee to remain with the company for the next five years, the stock vests according to the following schedule: 25 units in the second year after the bonus, 25 units in year three, 25 units in year four and 25 units in year five. If the employee leaves the company after year three, only 50 units would be vested while the other 50 are forfeited.

For some benefits, vesting is immediate. Employees are always 100% vested in their salary-deferral contributions to their retirement plans as well as SEP and SIMPLE employer contributions. Employer contributions to an employee’s 401(k) plan may vest immediately. Or, they may vest after several years using either a cliff vesting schedule, which gives the employee ownership of 100% of the employer’s contributions after a certain number of years, or using a graded vesting schedule, which gives the employee ownership of a percentage of the employer’s contribution each year. Traditional pension plans might have a five-year cliff vesting schedule or a three- to seven-year graded vesting schedule.

Just because you are fully vested in your employer’s contributions to your plan doesn’t mean you can withdraw that money whenever you want. You are still subject to the plan’s rules, which generally require you to reach retirement age before making penalty-free withdrawals.

RELATED TERMS
  1. Restricted Stock Unit

    Compensation offered by an employer to an employee in the form ...
  2. Graded Vesting

    The process by which employees gain a certain percentage of irrevocable ...
  3. Graduated Vesting

    The accelerated benefits employees receive as they increase the ...
  4. Employee Stock Option - ESO

    A stock option granted to specified employees of a company. ESOs ...
  5. Vested Interest

    1. The lawful right of an individual or entity to gain access ...
  6. Pension Plan

    A type of retirement plan, usually tax exempt, wherein an employer ...
Related Articles
  1. 3 Retirement Account Rules To Know
    Taxes

    3 Retirement Account Rules To Know

  2. Get The Most Out Of Employee Stock Options
    Investing Basics

    Get The Most Out Of Employee Stock Options

  3. Introduction To Employee Stock Purchase ...
    Investing Basics

    Introduction To Employee Stock Purchase ...

  4. The Benefits And Value Of Stock Options
    Options & Futures

    The Benefits And Value Of Stock Options

comments powered by Disqus
Hot Definitions
  1. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious ...
  2. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the ...
  3. Harvest Strategy

    A strategy in which investment in a particular line of business is reduced or eliminated because the revenue brought in by ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The ...
  6. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The ...
Trading Center