Vesting

Loading the player...

What is 'Vesting'

Vesting is 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.

BREAKING DOWN '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. Employee Stock Option - ESO

    A stock option granted to specified employees of a company. ESOs ...
  2. Restricted Stock Unit

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

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

    The accelerated benefits employees receive as they increase the ...
  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. Retirement

    SEP IRA Limits in 2016

    Discover the SEP IRA limits for 2016. Included is a summary, plans that would be ideal candidates for SEP IRAs, and contribution and distribution rules.
  2. Economics

    What Does Vesting Mean?

    Vesting is the process of accruing non-forfeitable rights.
  3. Entrepreneurship

    Business Owners: Rules For Qualified Retirement Plans

    Business owners need to take note of how they handle qualified-plan distributions to former employees.
  4. 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.
  5. Investing Basics

    Get The Most Out Of Employee Stock Options

    These plans can be lucrative for employees - if they know how to avoid unnecessary taxes.
  6. Investing Basics

    Introduction To Employee Stock Purchase Plans

    ESPPs offer a very straightforward method of allowing employees to participate in the overall profitability of their employers.
  7. Options & Futures

    The Benefits And Value Of Stock Options

    The pros and cons of corporate stock options have been debated since the incentive was created. Learn more about stock option basics and the cost of stock options.
  8. Options & Futures

    Avoid Premature Exercise On Employee Stock Options

    With early exercise, you forfeit some profit back to your employer, and incur income tax to boot.
  9. Options & Futures

    Expensing Employee Stock Options: Is There A Better Way?

    In 2009, Senators Carl Levin and John McCain introduced a bill to stop the excessive deductions for ESOs. But is there another solution?
  10. Options & Futures

    Employee Stock Options (ESO)

    Employee stock options are a form of equity compensation granted by companies to their employees and executives.
RELATED FAQS
  1. What are restricted shares?

    Understand what a restricted share is. Learn why a company would issue restricted shares to employees and why an employee ... Read Answer >>
  2. What are the main benefits of a Locked-in Retirement Account (LIRA)?

    Read about the main benefits you can realize from transferring your Canadian pension funds into a Locked-in Retirement Account, ... Read Answer >>
  3. Who is eligible for a Teacher Retirement?

    Learn about the retirement option, the Teacher Retirement System, offered to teachers and other public school employees, ... Read Answer >>
  4. Who is eligible for a qualified retirement plan?

    Meeting eligibility requirements for a qualified retirement plan vary but generally dictate a minimum age and a the amount ... Read Answer >>
  5. How are DB(k) plans set up?

    Learn how to establish a DB(k) plan. This hybrid qualified retirement plan can actually be easier to establish than other ... Read Answer >>
  6. How do I "vest" something?

    Vesting is a term usually related to pension plans that some employer's provide to their employees.An employer may make contributions ... Read Answer >>
Hot Definitions
  1. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  2. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  3. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  4. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  5. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  6. Economies Of Scale

    Economies of scale is the cost advantage that arises with increased output of a product. Economies of scale arise because ...
Trading Center