What Is Fully Vested?
Being fully vested means a person has rights to the full amount of some benefit, most commonly employee benefits such as stock options, profit sharing, or retirement benefits. Benefits that must be fully vested benefits often accrue to employees each year, but they only become the employee's property according to a vesting schedule.
Vesting may occur on a gradual schedule, such as 25%per year, or on a "cliff" schedule where 100% of benefits vest at a set time, such as four years after the award date. Fully vested may be compared with partially vested.
Key Takeaways
- Full vesting occurs when funds contributed by another party become fully accessible by the recipient beneficiary.
- Typically retirement benefit contributions that are matched by a company, or pension plan payments, will fully vest only after a certain number of years and other criteria have been met.
- Vesting schedules can either be graded (graduated) or occur suddenly after a certain threshold is met by an employee.
Understanding Fully Vested
To be fully vested, an employee must meet a threshold as set by the employer. This most common thresholdis employment longevity, with benefits released based on the amount of time the employee has been with the business. While employee-contributed funds to an investment vehicle, such as a 401(k), remain theproperty of the employee, even if that employee leaves the business, company-contributed funds may not become the employee’s property until a certain amount of time has elapsed.
An employee is considered fully vested when any and all agreed-upon requirements the company has set forthto become the full ownerof the associated benefit have been met. Thus, when an employee becomes fully vested, they become the official owner of all of the funds within their401(k) account, regardless of whether the employee or the employer contributed them.
Instituting a Vesting Schedule
To institute a vesting schedule, the employee must agree to the conditions set forth. Often, this requirement can be considered a condition of receiving the benefit. If an employee chooses not to accept the vesting schedule, they would surrender the rights to participate in employer-sponsored retirement benefits until choosing to agree. In those cases, employees may have the option of investing for retirement independently, such as through an individual retirement account (IRA) instead.
Business Benefits of Vesting Schedules
With vesting schedules, companies seek to retain talent by providing lucrative benefits contingent upon the employees' continued employment at the firm throughout the vesting period. An employee who leaves employment often loses all benefits that havenot yet vested at the time of departure. This type of incentive can be done on such a scale that an employee stands to lose tens of thousands of dollars by switching employers. This strategy can backfire when it promotes the retention of disgruntled employees who may hurt morale and do the minimum required until it is possible to collect previously un-vested benefits.
The most commonly used vesting schedule is graded or graduated vesting, which requires an employee to have worked for a certain number of years in order to be 100% vested in the employer-funded benefits. Each year worked, more money vests. This schedule of vesting differs fromcliff vesting, in which employees become immediately 100% vested following an initial period of service, and immediate vesting, in which contributions are owned by the employee as soon as they start the job.
