Graded Vesting

Definition

Vesting  according to a schedule where the participant is vested at a percentage amount ( that is less than 100%) each year until he/she accrues enough years of vesting-service to be 100% vested. As opposed to a cliff vesting schedule, where a participant becomes immediately 100% vested after accruing a number of years of vesting service,

Example:

  1. 3-year cliff vesting: A participant is 100% vested after 3-years of vesting service
  2. 2 to 6-year graded vesting: A participant is vested 20% after 2-years, 40% after 3-years, 60% after 4-years ,80% after 5-years and 100% after 6-years.  . 

Years of Vesting Service
Most restrictive Cliff vesting Schedule permissible for Defined contribution plans
Most restrictive Graded Vesting Schedule permissible for Defined contribution plans
1
0%
0% or more
2
0%
20% or more
3
100%
40% or more
4
100%
60% or more
5
100%
80% or more
6
100%
100% or more

Employer can make vesting schedule less restrictive. For instance, the employer can start the graded vesting in year one, or make the cliff effective for 2-years instead of three years
Referring Cite
IRC § 411(a)(2)(A), ERISA § 203(d)
Additional Helpful Information
  • Prior to the effective date of the pension protection act 06 2006 ( PPA) –specifically Section 904, a defined contribution plan satisfied the minimum vesting requirements of Code § 411(a) with respect to employer nonelective contributions if it maintained a 5-year vesting schedule or a 3 to 7 year vesting schedule.
  • Section 904 of PPA ‘06 amended the minimum vesting requirements to require faster vesting of employer nonelective contributions to a defined contribution plan.
  • Under Code § 411(a)(2)(B) as amended by § 904 of PPA ‘06, a defined contribution plan satisfies the minimum vesting requirements with respect to employer nonelective contributions if it has a 3-year vesting schedule or a 2 to 6 year vesting schedule.
  • Code § 411(a)(2)(B) as amended by § 904 of PPA ‘06 generally applies to contributions for plan years beginning after December 31, 2006. IRS Notice 2007-7
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