Vesting

 
Definition

The process by which participants gain ownership (or nonforfeitable rights) in employer contributions made to employer sponsored plans. Certain contributions are always immediately 100% vested. These include salary deferral contributions and all contributions to SEP and SIMPLE IRAs.

Referring Cite

IRC § 411(a)(2), IRC §416(b)(1)

 

Additional Helpful Information

A vesting schedule makes sense only if the plan covers non-owner employees. For plans that cover only the business owners (owner-only plans), for instance the SBO-401(k) plan, contributions are usually 100% vested.

For contributions that are not immediately 100% vested, the plan should be designed to include a vesting schedule which must be within the limits established under the Code.

For example, the following vesting schedule must be used for defined contribution plans

  

Years of Vesting Service
Cliff vesting
Graded
Vesting
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