Fully Vested Definition How Vesting Schedules Work and Benefits

Fully Vested: Definition, How Vesting Schedules Work and Benefits

What Is Fully Vested?

Being fully vested means a person has rights to the full amount of some benefit, such as stock options, profit sharing, or retirement benefits. Benefits that must be fully vested often accrue to employees each year but only become the employee’s property according to a vesting schedule.

Vesting may occur on a gradual schedule, such as 25 percent per year, or on a "cliff" schedule where 100 percent 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

– Fully vested occurs when funds contributed by another party become fully accessible.

– Retirement benefit contributions that are matched by a company, or pension plan payments, will fully vest after a certain number of years and other criteria.

– Vesting schedules can either be graded or occur suddenly after a certain threshold is met.

Understanding Fully Vested

To be fully vested, an employee must meet a threshold set by the employer. The most common threshold is employment longevity, with benefits released based on the employee’s time with the business. While employee-contributed funds remain the property of the employee, company-contributed funds may not become the employee’s property until a certain time has lapsed.

An employee is considered fully vested when they have met all agreed-upon requirements set by the company to become the full owner of the associated benefit. When an employee becomes fully vested, they become the official owner of all the funds within their 401(k) account, regardless of who contributed them.

Instituting a Vesting Schedule

To institute a vesting schedule, the employee must agree to the conditions set forth. Often, this requirement is 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 agreeing. 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 benefits contingent upon the employees’ continued employment. An employee who leaves employment often loses unvested benefits. This type of incentive can result in significant financial loss for employees who switch employers. However, it can also backfire by promoting the retention of disgruntled employees who may negatively impact morale and do the minimum required until they can collect previously unvested benefits.

The most commonly used vesting schedule is graded or graduated vesting. Each year worked, more money vests, and employees become 100% vested after a certain number of years. This schedule differs from cliff vesting, where employees become immediately 100% vested after an initial period of service, and immediate vesting, where contributions are owned by the employee as soon as they start the job.