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February 15, 2009

Vesting

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Definition

The process by which participants gain ownership (or nonforfeitable rights) in employer contributions made to employer sponsored plans. Certain contributions are always immediately 100% vested. These include salary deferral contributions and all contributions to SEP and SIMPLE IRAs.

Referring Cite

IRC § 411(a)(2), IRC §416(b)(1)

Additional Helpful Information

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.

For contributions that are not immediately 100% vested, the plan should be designed to include a vesting schedule which must be within the limits established under the Code.

For example, the following vesting schedule must be used for defined contribution plans

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
More

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Applicable RMD Age

Applicable RMD Age The first year for which an IRA owner or plan participant must begin to take RMDs from their tax-deferred retirement account. RMDs

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

Required Minimum Distribution (RMD)

Definition The minimum amount that must be withdrawn from retirement accounts, including qualified plans, 403(b) accounts, 457(b) accounts or IRAs, each year.  For retirement account

Required beginning date (RBD)

Definition The date by which a retirement account owner must begin distributing required minimum distribution (RMD) amounts from a Traditional,  SEP or SIMPLE IRA, a

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