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. Graded Vesting

    The process by which employees gain a certain percentage of irrevocable ...
  2. Cliff Vesting

    The process by which employees earn the right to receive full ...
  3. Graduated Vesting

    The accelerated benefits employees receive as they increase the ...
  4. Vested Benefit

    A financial incentive of employment that an employee is fully ...
  5. Fully Vested

    A person's right to the full amount of some type of benefit, ...
  6. Vested Interest

    1. The lawful right of an individual or entity to gain access ...
Related Articles
  1. Small Business

    What Does Vesting Mean?

    Vesting is the process of accruing non-forfeitable rights.
  2. Retirement

    How do you calculate penalties on a 401(k) early withdrawal?

    Find out how to calculate the penalties on early withdrawals from your 401(k), including the impact of the additional 10% tax penalty, vesting and income tax.
  3. Small Business

    Plans The Small-Business Owner Can Establish

    Don't hesitate to adopt a smart plan for you and your employees.
  4. Small Business

    How Restricted Stocks and RSUs Are Taxed

    Many firms pay a portion of their employees’ compensation in the form of restricted stock or restricted stock units.
  5. Taxes

    How Restricted Stock and RSUs Are Taxed

    This form of executive compensation limits how these stocks can be sold. Find out more here.
  6. Taxes

    Is HD Vest Financial Services Right for You?

    Here's what you need to know about HD Vest Financial Services.
  7. Retirement

    It’s Never Too Late to Contribute to Your 401(k)

    Find out why it is never the wrong time to start contributing to a 401(k), even in your late 30s, 40s or 50s; discover how to maximize your savings at any age.
  8. Retirement

    5 Lesser-Known Retirement And Benefit Plans

    These plans aren't widely used, but they fill a specific niche for employees in certain situations.
  9. Retirement

    Can You Deduct Your IRA Contributions?

    We help you answer this important question, which is determined by whether you are considered an "active participant".
  10. Retirement

    Smart Retirement Strategies Even Without A Pension

    Not every retirement plan is a pension. Know the difference and decide which options are best for you. Even without a pension, there are good choices.
RELATED FAQS
  1. What is cliff vesting?

    An employee is considered "vested" in an employer benefit plan, once they have earned the right to receive benefits from ... Read Answer >>
  2. Can my company ever be entitled to take my 401(k)?

    Find out why your employer may be able to take part of your 401(k) if you leave your employment too soon, including how different ... Read Answer >>
  3. 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 >>
  4. What are the penalties of cashing out a 401(k) before retirement?

    Learn about the penalties for early 401(k) distributions, including how taxes and vesting schedules can reduce your net withdrawal. Read Answer >>
  5. Based on the Employment Retirement Income Security Act (ERISA), a retirement plan ...

    The correct answer is b. With regard to eligibility, the plan must cover all employees 21 and older who have worked for the ... Read Answer >>
Hot Definitions
  1. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  2. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  3. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  4. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  5. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  6. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
Trading Center