Vesting refers to a pension plan participant's right to receive the pension benefits. If you participate in a pension plan, your vested benefits are those that you have earned a right to receive and that you can't forfeit. The Employees Retirement Social Security Act lays down what sort of eligibility requirements private plan sponsors should follow for vesting and also the types of vesting. ERISA also lays out what should be done in certain circumstances if the plan is not able to meet its pension obligations.
Requirements For Vesting
There are different eligibility requirements for you to become vested in your pension benefits if you are in a defined benefit plan and if you are in a defined contribution plan. A defined benefit plan offers you a stated monthly pension payment at retirement. Defined benefit plans usually set down a minimum number of years of service for you to be vested in your pension benefits. In a defined contribution plan, such as a 401k plan, you are always vested in any contributions you make to the plan. There are federal rules that govern how you become vested in your employer's contributions on your behalf.
Types Of Vesting
There are two types of vesting schedules that companies follow. Under cliff vesting, employers state how many years of service they require for you to become vested in the pension plan benefits. For instance, you could be eligible after five years of service. Under a graduated vesting schedule, your employer could say you are 100 percent vested in retirement benefits after eight years of service, but also set up a schedule to provide partial vesting before that. For instance, you could become vested in 25 percent of the benefits after two years of service, 50 percent after four years and 75 percent after six years.
There are some circumstances under which pension plans are terminated. Federal law also spell out how to deal with vested pension benefits in these cases. When a plan is terminated, employees become 100 percent vested in their accrued benefits. In case your plan is a defined benefit pension plan, payments on your pension are guaranteed by the Pension Benefit Guaranty Corporation. In the case of a defined contribution plan, the plan fiduciaries should manage the plan and pay out benefits.