Vesting refers to an employee’s entitlement to funds contributed to a qualified, employer-sponsored retirement plan. An employee’s contributions—and any earnings on these contributions—are fully vested from his or her start in the plan. An employer’s matching contributions, on the other hand, may vest according to a schedule set by the employer, as specified in the plan document and following applicable regulations. Therefore, an employer can arrange his or her contributions to follow a vesting schedule that rewards loyalty by fully vesting plan participants after a specified number of years.
For plans established after 2002, employer contributions must vest 100% after three years of service, or within six years, beginning at 20% after two years of service and then increasing 20% annually. Plans begun before 2002 must permit 100% vesting after five years of service, or within seven years, beginning at 20% after three years and then increasing 20% annually. Different vesting requirements apply to certain “top-heavy” plans. While minimum vesting requirements must be met, an employer may choose to allow employees access to their full benefits on an accelerated schedule. Further, an employee who reaches normal retirement age (NRA) is generally entitled to 100% vesting.
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