Vesting
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In law vesting is to give an immediately secured right of present or future enjoyment. Basically that means being able to take full advantages of the asset in which one is vested. Typically this term is used in conjunction with a retirement plan such as a 401k or pension plan. Vesting provisions also apply to employee stock options. Once a person is vested the employer cannot forfeit their right to the money or other asset.
For retirement plans in the United States vesting only comes into play with employer contributed money since employees are immediately 100% vested in their own salary deferral contributions. For employer contributions, the employer has options under the IRS code to delay the vesting of their contributions to the employee. For example, the employer can say that the employee must work with the company for 3 years or they lose any employer contributed money, which is known as cliff vesting. Or they can choose to have the employee vest in 20% of the contributions each year over 5 years, known as graduated vesting.
Vesting allows an employer to reward only employees that remain employed for a period of time. In this way extra money they contribute on behalf of employees goes to the ones they most want to reward.
External links
- [1] (http://www.tiaa-cref.org/advisors/403b/403b_vesting.html) TIAA CREF discussion of vesting