What is Vesting?

Vesting determines when you fully own the money your employer contributes to your retirement account. While employees are always 100% immediately vested in their own salary deferrals, employer contributions are often subject to a schedule that rewards employee longevity. Vesting rules are governed by the Employee Retirement Income Security Act (ERISA) and monitored by the Department of Labor and the IRS.

Employer-sponsored plans typically use one of two ERISA-compliant vesting schedules: cliff vesting or graded vesting. In a 3-year cliff vesting schedule, the employee is 0% vested in employer funds until they complete three years of service, at which point they instantly become 100% vested. In a 6-year graded vesting schedule, ownership increases incrementally: 20% after two years, and 20% more each year until reaching 100% after six years.

If an employee leaves the company before becoming fully vested, they forfeit the unvested portion of the employer's contributions back to the plan. Some plans, such as Safe Harbor 401(k)s and SIMPLE plans, require immediate 100% vesting of all employer matching contributions, offering no waiting period.