Save time with our cheat sheets, fact sheets, checklists & books!

March 5, 2009

Graded Vesting

Your Guide



Vesting  according to a 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. As opposed to a cliff vesting schedule, where a participant becomes immediately 100% vested after accruing a number of years of vesting service.


  1. 3-year cliff vesting: A participant is 100% vested after 3-years of vesting service
  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
0% or more
20% or more
40% or more
60% or more
80% or more
100% or more
Employer 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(d)
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
Related Articles Tutorial or Other Content

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.


Keep Learning


Definition A deduction is a Tax write-off which is allowed for contributions to traditional IRAs or employer sponsored plans. Individuals who are active participants are

Annual Addition Limit

Definition The annual Addition limit is the maximum amount that may be added to a defined contribution plan on behalf of a participant for any

SIMPLE 401(k) Plan

Definition A SIMPLE 401(k) plan is a 401(k) plan  established by a small business for it’s employees. Earnings accrue on a tax-deferred basis and distributions

Salary Deferral Contribution

Definition A contribution made pursuant to a participant’s election to have a portion of his/her salary/wages  contributed to his/ her employer sponsored plan  rather than

Be among the first to know when

IRA Rules