What is cliff vesting?
Cliff vesting refers to an employee's rights in an employer pension plan being completely vested at one point in time. The employee has no rights until that point and full rights after that point.
Other plans vest partially. In such plans, an employee's rights might be vested 20% per year for 5 years. All things being equal, a partially vesting plan protects the employee because even if they change jobs within the first 5 years (in this example), the employee would at least get a partial benefit. If the plan used cliff vesting, the employee would receive nothing if they terminate employment (for any reason) prior to the vesting point.
Cliff vesting is a term used for retirement plans and employee stock options and RSUs to describe the rights of the employee to the employer's contribution. A cliff vesting happens when the entire amount in question vests on a given date. Alternatively, vesting can happen progressively over time on a defined schedule, for instance 20% a year for five years.
An employee is considered "vested" in an employer benefit plan, once they have earned the right to receive benefits from that plan. Cliff vesting is when the employee becomes fully vested at specified time rather than becoming partially vested in increasing amounts over an extended period of time. An example of "cliff vesting" would be when an employee is fully vested in a pension plan after 5 years of full time service. Partial vesting would occur if the employee were considered 20% vested after two years of employment, 30% vested after three years of employment and 100% vested after 10 years of employment. In a cliff vesting pension plan, if an employee leaves the company before becoming fully vested, he or she would not receive any retirement benefits.
For more on this topic, be sure to read our Retirement Plans Tutorial.
This question was answered by Katie Adams.
Cliff vesting means that for the first two years, any employer contributions are not vested into the plan. After the third year, all the employer contributions are 100% vested. For example, if you worked for a company and left after two years, any of your employer contributions will not be eligible to you. One thing to remember, any contributions you make to the plan are 100% vested and go with you no matter what.