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Vesting Schedule

Last Updated May 8, 2009

Definition

The timetable by which participants become vested in employer contributions made to employer sponsored plans.

Employer contributions to certain plans cannot be placed on a vesting schedule, i.e. they are automatically 100% vested.  This includes contributions to SEP IRAs and SIMPLE IRAs, SIMPLE 401(k)s and Safe Harbor 401(k) plans.

A vesting schedule makes sense only if the plan covers non-owner employees. For plans that cover only the business owners (owner-only plans), for instance the SBO-401(k) plan, contributions are usually 100% vested.

The vesting schedule must be within the limits established under the Code. For example, the following vesting schedule must be used for defined contribution plans, unless the employer wants to implement a reduced schedule.

 

Years of Vesting Service
Cliff vesting
Graded
Vesting
1
0%
0% or more
2
0%
20% or more
3
100%
40% or more
4
100%
60% or more
5
100%
80% or more
6
100%
100% or more

  • PPA amended ERISA and Code rules relating to vesting to provide that an applicable defined benefit plan must provide that each employee who has completed at least three years of serves has a nonforfeitable right to 100 percent of the employee’s accrued benefit derived from employer contributions. An applicable defined benefit plan is a defined benefit plan under which the accrued benefit (or any portion thereof) is calculated as the balance of a hypothetical account maintained for the participant or as an accumulated percentage of the participant’s final average compensation. The Secretary of the Treasury is to provide rules which include in the definition of an applicable defined benefit plan any defined benefit plan (or portion of such a plan) which has an effect similar to an applicable defined benefit plan.

Referring Cite

IRC § 411(a)(2), IRC §416(b)(1)

 

Additional Helpful Information

  • Prior to the effective date of PPA ‘06 § 904, a defined contribution plan satisfied the minimum vesting requirements with respect to employer nonelective contributions if it maintained a 5-year cliff vesting schedule or a 3 to 7 year graded vesting schedule. Section 904 of PPA ‘06 amended the minimum vesting requirements to require faster vesting of employer nonelective contributions to a defined contribution plan. Under Code § 411(a)(2)(B) as amended by § 904 of PPA ‘06, a defined contribution plan satisfies the minimum vesting requirements with respect to employer nonelective contributions if it has a 3-year cliff vesting schedule or a 2 to 6 year graded vesting schedule. Code § 411(a)(2)(B) as amended by § 904 of PPA ‘06 generally applies to contributions for plan years beginning after December 31, 2006
  • A plan can have a vesting schedule for employer nonelective contributions for plan years beginning after December 31, 2006, and another vesting schedule for other employer nonelective contributions under the plan, provided that the plan separately accounts for the contributions made under the vesting schedule in effect prior to the first day of the first plan year beginning after December 31, 2006, and the vesting schedule for employer nonelective contributions for plan years beginning after December 31, 2006, satisfies the new schedule under PPA’ 06