Pension vesting for defined-benefit plans can occur in a variety of ways. Your benefits can vest immediately, or vesting can be spread out over up to seven years. It’s important to understand how your pension vests, because the vesting schedule determines when you are eligible to receive full pension benefits. Also, your plan’s vesting schedule might be a factor if you’re thinking about changing jobs – perhaps you don’t want to leave until you’re fully vested. In addition, the vesting schedule matters if you had a pension with an employer for whom you no longer work and want to know to what pension benefits you’re entitled. (For more, see A Primer on Defined-Benefit Pension Plans.)
Who Owns Employee Contributions
You do. If your employer requires or allows you to contribute part of your salary to your pension, you always fully own those contributions. In other words, if you contributed $200 to your pension with last Friday’s paycheck and you quit your job the following Monday, you wouldn’t leave any of that $200 behind – or any of the money you contributed to your pension from previous paychecks – when you left your job.
Pension Vesting for Employer Contributions
What you might leave behind if you change jobs are your employer’s contributions to your pension plan, that's the part that "vests," depending on the plan’s vesting schedule and the type of plan in which you’re participating. The following rules apply to defined-benefit pension plans. Defined-contribution plans, such as 401(k)s, and applicable defined-benefit plans, such as cash-balance and pension-equity plans, follow different rules (though there are some similarities).
The years of service an employee must complete with an employer to be fully vested depend on whether the pension has a cliff vesting schedule or a graduated vesting schedule. Under the former, employees become fully vested in their pensions after a certain number of years. A federal law called the Employee Retirement Income Security Act (ERISA) states that the maximum is five years for private-sector plans, but employers can allow full vesting sooner. For example, under ExxonMobil’s pension plan, workers are fully vested after five years of vested service or after turning 65, whichever comes first.
If your plan has a cliff vesting schedule in which employees become fully vested after five years, you will receive none of your employer’s contributions if you leave your job before your five-year anniversary. You will, however, remain vested in your own contributions, as explained in the previous section.
Under graduated vesting, there is partial vesting for each year of service once you’ve served three years. For private-sector plans, at a minimum, after year three you become 20% vested in your pension, after year four you become 40% vested, after year five you become 60% vested, after year six you become 80% vested and, finally, after year seven you become 100% vested.
Your employer is free to offer a more generous graduated vesting schedule, however. “A traditional defined-benefit plan could vest 50% after two years of service and 100% after four years of service,” says actuary John Lowell, a consultant with Atlanta-based October Three Consulting, which provides retirement program design and related services. “On the other hand, a plan with a vesting schedule vesting 50% after four years of service and 100% after six years of service would not be acceptable, as it does not equal or exceed either of the permissible schedules at all points in time.”
When You Can Collect Private Pension Plan Benefits
Being fully vested in your pension does not mean that you can access the money immediately. Under federal law, employees earn the right to receive their pension benefits when they reach normal retirement age, in addition to meeting the years of service requirements described above. “Normal retirement age for an ERISA-covered plan is defined by the plan,” Lowell says. It may not be later than age 65 with five years of service.
Governmental and Church Pensions
If you participate in a governmental or church pension plan rather than a private-sector pension plan, ERISA rules do not apply. Governmental plans cover employees of the federal government, any state government and any political division, agency or instrumentality of a federal or state government, such as teachers and school administrators. Church pension plans can cover not only direct church employees but also employees of a hospital, school or nonprofit organization associated with the church. Participants in the Florida Retirement System, for example, are fully vested after six years of service if they enrolled in the plan before July 1, 2011, or after eight years of service if they enrolled in the plan on or after July 1, 2011.
Whatever type of employer you have, you can discover your vesting schedule by consulting your summary plan description. You can get the document from either your company’s human resources department or pension plan administrator.
Exceptions to ERISA
Under either vesting schedule, when calculating years of service employers aren’t required to count years you worked for them before age 18, years during which you didn’t contribute to a plan that required employee contributions or years when the employer didn’t maintain the plan or a predecessor plan. Employers also may not count years when you were not a regular employee. In some cases you might be credited with partial years of service for years when you weren’t a regular employee.
Also, if you earned pension benefits before the mid-1980s, the rules described in the previous sections do not apply to you. According to the Pension Benefit Guaranty Corporation (PBGC), pension plans usually required 20 or more years of service before the mid-1970s, and they usually required 10 years of service before the mid-1980s. If you completed fewer years of service during these periods, you might not be vested in any pension benefits at all from those years of work.
Specifically, if you participated in a private-sector pension plan from 1974 through 1988 and your employer used a cliff vesting schedule, you were 0% vested until you completed at least 10 years of service, at which point you became 100% vested. If your employer used a graduated vesting schedule, you became 25% vested after five years of service, with a 5% increase in vesting each year until 15 years of service, at which point you were 100% vested.
Further, an exception called “the rule of 45” said that if an employee’s age and years of service totaled 45 and he or she had at least five years of service with that employer, then at least 50% of benefits must be vested, with at least a 10% increase each year thereafter.
Breaks in Employment
What happens if you work for the same private-sector employer for several years, but those years of service are not consecutive? Are you vested in your pension plan?
ERISA says that if you leave an employer and return within five years, the plan is usually required to count your earlier years of service. So if you worked for a private firm from 2010 through 2012 (three years), then went to another company for 2013 and 2014 (two years) only to return to your former employer in 2015 and stay (two years), you will usually be vested in your plan – either fully, if the plan uses cliff vesting, or at least partially, if the plan uses graduated vesting. Again, your summary plan description should explain how your employer handles this situation.
The Bottom Line
Figuring out how your pension vests can be tricky, but it’s crucial to understand, so you can make the best decisions about whether and when to change jobs and collect all the pension benefits to which you’re entitled when you retire. (For more, see Pension Plans: Pain or Pleasure?)