Vesting in a retirement plan refers to the process by which an employee becomes entitled to the employer's contributions to the plan. When a retirement plan becomes vested, it means that the employee has earned the right to receive the employer's contributions, even if they leave the company before retirement age.
There are typically different vesting schedules depending on the retirement plan. Some plans have immediate vesting, which means the employee is immediately entitled to the full amount contributed by the employer. Other plans have graded or cliff vesting schedules, where the employee becomes vested gradually over a certain period of time.
For example, a retirement plan may have a graded vesting schedule where an employee becomes 20% vested after two years of service, 40% vested after three years, 60% vested after four years, and so on until they are fully vested after a certain number of years.
It is important to note that while the employee is always fully vested in their own contributions to the retirement plan, vesting refers specifically to the employer's contributions.
If an employee leaves a company before becoming fully vested, they may only be entitled to a portion of the employer's contributions. The non-vested portion is typically forfeited and remains with the employer.
Understanding the vesting schedule of a retirement plan is crucial to determine how much of the employer's contributions an employee will be able to keep if they leave the company before retirement. It is always advisable to review the vesting terms of a retirement plan and consider them when making decisions about employment and retirement planning.