A:

Vesting is a term usually related to pension plans that some employer's provide to their employees.An employer may make contributions to the plan by matching the employee's contributions or set aside an amount based on a percentage of the employee's salary and their years of service, depending on how the plan is set up. An employee is considered "vested" in a pension plan, once they have earned the right to receive benefits from the plan upon retirement. This is based on a minimum time period of employment. When working for a company that offers a pension plan, the employee "vests" in the plan by fulfilling the employee's financial obligations and work requirements as defined by the plan.

Vesting can also refer to other employer provided benefits, such as stock options. Many employers provide employees the opportunity or "option" to purchase shares of the company's stock at a future date at a predetermined set price. To cash-in on the "option" or purchase the stock at the set price, the employee must usually remain employed by the company from the time the "option" is granted until the date that it can be exercised. At that time the employee is considered vested as defined by the terms of the stock option.

(For more on this read, The 401k and Qualified Plans: Introduction and Get the Most out of Employee Stock Options.)

This question was answered by Katie Adams.

RELATED FAQS
  1. 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 >>
  2. What is a vest fleece?

    A vest fleece is a term first coined by Jack Ciesielski, founder of The Analyst's Accounting Observer, and it relates to ... Read Answer >>
Related Articles
  1. Small Business

    What Does Vesting Mean?

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

    5 Companies With the Best Retirement Plans

    Ever wonder how your company retirement plan stacks up against the country's best employers? Take a peek at these great retirement plans.
  3. Financial Advisor

    Understanding Rules on Defined Benefit Pension Plans

    Defined benefit plans offer advantages to both employers and employees. Employers must understand the federal tax rules when establishing these plans.
  4. Retirement

    Five Questions to Ask About Your Company's 401(k) Plan

    Having a comfortable retirement depends on taking maximum advantage of your company's 401(k), if it's offered.
  5. 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.
  6. Financial Advisor

    Life Insurance Plans to Help Your Small Business Retain Employees

    How to use and design cash value life insurance plans as an incentive to help attract and retain key employees.
  7. Taxes

    How Restricted Stock and RSUs Are Taxed

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

    Is a SIMPLE IRA Right for Your Small Business?

    Here's how small businesses can benefit from offering a SIMPLE IRA to their employees.
RELATED TERMS
  1. Graduated Vesting

    The accelerated benefits employees receive as they increase the ...
  2. Cliff Vesting

    The process by which employees earn the right to receive full ...
  3. Vested Benefit

    A financial incentive of employment that an employee is fully ...
  4. Withdrawal Credits, Pension Plan

    The rights of an employee who has a qualified pension plan to ...
  5. Unconditional Vesting

    Pension benefits that are entitled to the employee without any ...
  6. Vest Fleece

    A slang term used to describe a situation in which a company's ...
Hot Definitions
  1. Time In Force

    Time in force is a special instruction used when placing a trade to indicate how long an order will remain active before ...
  2. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
  3. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
  4. Inverse Transaction

    A transaction that can cancel out a forward contract that has the same value date.
  5. Redemption

    The return of an investor's principal in a fixed income security, such as a preferred stock or bond; or the sale of units ...
  6. Solvency

    The ability of a company to meet its long-term financial obligations. Solvency is essential to staying in business, but a ...
Trading Center