Definition
Vesting according to a schedule where a participant becomes immediately 100% vested after accruing a number of years of service, as opposed to a graded vesting schedule, where the participant is vested at a percentage amount ( that is less than 100%) each year until he/she accrues enough years of vesting-service to be 100% vested.
Example:
- 3-year cliff vesting: A participant is 100% vested after 3-years of vesting service Vs
- 2 to 6-year graded vesting: A participant is vested 20% after 2-years, 40% after 3-years, 60% after 4-years, 80% after 5-years and 100% after 6-years.
|
Years of Vesting Service |
Most restrictive Cliff vesting Schedule permissible for Defined contribution plans |
Most restrictive Graded Vesting Schedule permissible for Defined contribution plans |
|
1 |
0% |
0% or more |
|
2 |
0% |
20% or more |
|
3 |
100% |
40% or more |
|
4 |
100% |
60% or more |
|
5 |
100% |
80% or more |
|
6 |
100% |
100% or more |
Employers can make vesting schedule less restrictive. For instance, the employer can start the graded vesting in year one, or make the cliff effective for 2-years instead of three years
Referring Cite
IRC § 411(a)(2)(A), ERISA § 203(a)(1)
Additional Helpful Information
-
Prior to the effective date of the pension protection act 06 2006 ( PPA) –specifically Section 904, a defined contribution plan satisfied the minimum vesting requirements of Code § 411(a) with respect to employer nonelective contributions if it maintained a 5-year vesting schedule or a 3 to 7 year vesting schedule.
-
Section 904 of PPA ‘06 amended the minimum vesting requirements to require faster vesting of employer nonelective contributions to a defined contribution plan. Under Code § 411(a)(2)(B) as amended by § 904 of PPA ‘06, a defined contribution plan satisfies the minimum vesting requirements with respect to employer nonelective contributions if it has a 3-year vesting schedule or a 2 to 6 year vesting schedule.
-
Code § 411(a)(2)(B) as amended by § 904 of PPA ‘06 generally applies to contributions for plan years beginning after December 31, 2006. IRS Notice 2007-7
