Vesting is the process by which a plan participant acquires a non-forfeitable right to plan contributions or benefits (and earnings thereon). Vesting schedules are set up during the plan design process. The two basic forms of vesting schedule are the cliff vesting schedule and the graded vesting schedule.

Cliff vesting is designed so that the employee becomes entitled to employer contributions only after working for the employer for a certain number of years. For example, a three-year 100 percent cliff vesting schedule means that the employee must have three years of service with the employer in order to have the right to keep the employer contributions.

With graded vesting, an employee gradually becomes entitled to the amount of money the employer has contributed. For example, a six-year graded vesting schedule may be set up so that the employee is entitled to 20 percent of employer contributions after two years, 40 percent after three years, 60 percent after four years, 80 percent after five years and 100 percent after six years of service.

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