You might wonder, "What does it mean to be vested in a company retirement plan?" The meaning depends on the type of plan you have.
Vesting in a company means that you've worked for that company long enough to be entitled to full pension benefits in your company's retirement plan. On the other hand, vesting in a defined benefit plan means you're eligible to receive a monthly pension at retirement age. When you're vested in a defined contribution plan, like a 401(k), you're fully entitled to any company plan contributions if you leave employment.
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Vesting of Your Own Contributions
Any money that you contribute to your 401(k) pension plan from your paycheck is 100 percent vested immediately. The fully vested definition means that if you quit or are fired at any time, that money is yours to keep, as well as any earnings on that money.
This money can be left in the plan with the company, or you may roll it to an IRA or 401(k) with your new company. You will still have to pay the 10 percent tax penalty plus any taxes on that amount as regular income if you choose to withdraw the money.
Vesting of Company Contributions
Company contributions to your plan work differently. Your company is allowed to hold back some of that money, not making it immediately available to you. This is to give you an incentive to stay at your company longer. This withholding applies to the company's contributions, as well as any return that these contributions produce in the plan.
Most retirement fund statements show the company's contributions separate from your own contributions to help you figure the vested amount in the fund. If you leave your job for any reason before the vesting period, you forfeit all of your non-vested pension plan money.
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Percentage Method Vesting Period Meaning
Most 401(k) plans using percentage vesting use the same schedule. You must vest at least 20 percent of your company's contribution when you have completed two years of service. At three years, you are 40 percent vested. The vesting percentage increases by 20 percent each year, until you become fully vested at six years of service.
At that time, all of your company's contributions are available to you for retirement purposes or withdrawal for other reasons. If you have an older plan with a company you worked for before 2002, the vesting schedule may have been different.
Cliff Method Vesting Period Meaning
Your employer may not use the percentage vesting method, but may use cliff vesting instead. Under cliff vesting, if you left your job after 2002, you would be zero percent vested in your pension until three years of service with your company. At the three-year mark, you would become completely vested, and all of your company's contributions are yours. Cliff vesting with older plans works similarly, but the time period for 100 percent vesting may be longer than three years.
Consider also: What Is the Meaning of Vesting Date in Stock Options?
Defining Time Periods
Vesting time periods generally refer to the amount of time that you have worked for your employer, not how long you have participated in the plan, with a couple of exceptions. An employer can begin counting your years of service with the company when you turn 18 if you started working at a company at a younger age. Also, a company may define your vesting period by years of plan participation if you do not choose to start contributing to your plan when you first become eligible.