How Long to Be Vested in a Retirement Plan Per Federal Law?

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Vesting refers to the percentage of your retirement plan you get to keep if you leave the company. Though your employer may fully vest you in your entire plan immediate, more employers use a vesting schedule. The speed at which you vest in your contributions differs from the speed at which you vest in your employer's contributions.

Your Contributions

You are 100 percent vested in money that you contribute to a retirement plan. This applies to all types of retirement plans, including 401(k) plans, 403(b) plans and IRAs. No matter how long you work for a company, when you leave, you always get to keep your contributions even if you are not entitled to keep any of the contributions your employer made on your behalf.

Cliff Vesting

One option employers may choose for vesting their employees is the cliff vesting schedule. Under this schedule, federal law requires that an employee be fully vested in employer contributions by the end of the third year. Prior to the third year, employees need not be vested at all. For example, if your company uses the cliff vesting and requires three years of service, if you left after 2.5 years, you would not be entitled to claim any of your employer's contributions to your retirement plan on your behalf.

Graded Vesting

Employers also have the option to gradually vest their employees in the employer's contributions to the retirement plan. Under this plan, you must gain at least a 20 percent vesting by the end of the second year. Each year after that, you gain a minimum of 20 percent more vesting so that by the end of your sixth year, you will be 100 percent vested in your employer contributions as well as your individual contributions.

Employer Requirements are Minimums

The cliff vesting schedule and the graded vesting schedule required by the government are not the only options for employers, but rather set a baseline for when employees must be fully vested in their contributions. For example, a company would be allowed to fully vest its employees in two years, because that is faster than the required three years. However, a company could not use a cliff vesting after four years, because that would be longer than the mandated period.

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