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February 18, 2009

Cliff vesting

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Definition

Vesting according to a schedule where a participant becomes immediately 100% vested after accruing a number of years of service, as opposed to a graded vesting schedule, where the participant is vested at a percentage amount ( that is less than 100%) each year until he/she accrues enough years of vesting-service to be 100% vested.

Example:

  1. 3-year cliff vesting: A participant is 100% vested after 3-years of vesting service Vs
  2. 2 to 6-year graded vesting: A participant is vested 20% after 2-years, 40% after 3-years, 60% after 4-years, 80% after 5-years and 100% after 6-years.

Years of Vesting Service

Most restrictive Cliff vesting Schedule permissible for Defined contribution plans

Most restrictive Graded Vesting Schedule permissible for Defined contribution plans

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

Employers can make vesting schedule less restrictive. For instance, the employer can start the graded vesting in year one, or make the cliff effective for 2-years instead of three years

Referring Cite

IRC § 411(a)(2)(A), ERISA § 203(a)(1)

Additional Helpful Information

  • Prior to the effective date of the pension protection act 06 2006 ( PPA) –specifically Section 904, a defined contribution plan satisfied the minimum vesting requirements of Code § 411(a) with respect to employer nonelective contributions if it maintained a 5-year vesting schedule or a 3 to 7 year 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 vesting schedule or a 2 to 6 year 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. IRS Notice 2007-7
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