Pension Plan Vesting Schedules: What You Need to Know
If you are currently employed or planning for retirement, understanding pension plan vesting schedules is crucial. A vesting schedule determines how much of your employer’s contributions to a retirement plan you own if you leave the company before retirement age.
There are two types of vesting schedules: cliff vesting and graded vesting. Cliff vesting means that an employee is fully vested after a certain number of years, while graded vesting allows employees to become partially vested over time.
Cliff Vesting
With cliff vesting, an employee becomes fully vested in their pension plan after a set period of time. This means they have full ownership of all employer contributions made on their behalf. The most common cliff-vested schedule requires five years of service with the company before becoming fully vested.
However, some companies may have different periods such as three or seven-year cliffs. If an employee leaves the company before reaching full vestment status, they forfeit any unvested benefits from the employer’s contribution portion of the account.
Graded Vesting
Undergraded plans, employees earn partial ownership rights over their employers’ contributions gradually over several years. This approach minimizes loss when leaving employment but does not inspire loyalty among employees who might be interested in maximizing gains with one employer long-term.
A typical graded schedule vests at 20% per year (fully vested after five years). If an employee were to leave during year two under this schedule, they would still have access to 40% of their employers’ contributions made on their behalf up until that point.
Vesting Schedule Exceptions
Some circumstances allow for quicker or immediate access to earned benefits regardless of whether it falls within either type mentioned above:
– An acquisition – When a new organization takes over another organization and adopts its workforce/employees.
– Retirement – Employees who retire are eligible for immediate and complete access.
– Death/Disability – Employees who die or become disabled can receive immediate access.
In Conclusion
It is important to understand your company’s specific vesting schedule when planning for retirement. By knowing the vesting schedule, you can determine how much of the employer’s contribution portion of your account you will have access to should you leave before retirement age.
Remember that if an employee leaves before becoming fully vested under a cliff-vested plan, they forfeit any unvested benefits from employer contributions made on their behalf. However, with graded plans, partial ownership rights are earned gradually over several years and may minimize loss when leaving employment.
Knowing these details could help make better choices regarding long-term career goals and increased earnings in the future.