Vesting in a company provides an employee with non-forfeitable rights over employer contributions or employer-provided stock incentives made to the employee’s retirement account or pension plan. Vesting occurs when an employee or individual acquires ownership. Financial vehicles, such as retirement savings plans, pensions or profit-sharing plans, are examples of vesting rights.
Vesting schedules determine when employees acquire full ownership of their benefits. The vesting schedule is created by the employer and revolves around the length of employment. The minimum length of employment and other requirements necessary to receive vesting rights varies by company and the individual vesting schedule. Common vesting plans award employees restricted stock units as part of an annual bonus package. These agreements often require employees to stay with the company for a minimum number of years. After each year, a portion of the restricted stock vests and becomes the employee’s to own.
For other benefits, vesting is immediate. Employees are definitively vested in their salary-deferral retirement plans. Employer-matching contributions to these plans may vest immediately or after several years through a cliff-vesting schedule or a graded-vesting schedule. The cliff-vesting schedule gives the employee ownership of the employer’s contributions after a certain length of time, while the graded-vesting schedule gives the employee ownership of a percentage of the employee’s contribution on an annual basis.
Being vested in a company does not allow the employee to withdraw money whenever he wants. Vested employees are subject to the plan’s regulations, which typically require the employee to reach retirement age before making penalty-free withdrawals.