What Does "Vesting Service" for Retirement Mean?

Some employers offer retirement plans through the company, such as 401k plans, which permit employer contributions to the account. Vesting refers to the service required for an employee to keep the employer contributions when he leaves the company.

Types

Vesting can occur immediately, gradually or completely after a certain period. The Internal Revenue Service permits, but does not require, vesting service periods, and some companies do not require them either. Gradual vesting occurs when a company partially vests employees each year. For example, a company may elect to vest employees at 25 percent each year so after four years the employee is 100 percent vested. Other companies may completely vest an employee after the employee has completed three years of work.

Considerations

The IRS requires companies that terminate their retirement plan to immediately vest all employees. For example, if a company decides to terminate its 401k plan, all workers become immediately vested in their accounts at that time.

Misconceptions

Employees must always be completely vested in contributions they make to the plan themselves. Vesting only applies to contributions an employer makes on behalf of the employee.

References

• IRS: 401k Plan Overview
• IRS: Retirement Topics - Vesting
• IRS: Retirement Topics - Termination of Plan