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.
Different vesting requirements apply to employer contributions depending on the type of plan. For a SEP and SIMPLE IRA plan, all contributions to the plan are always 100% vested. For qualified defined contribution plans, there are a variety of different vesting schedules that are determined by the plan document. These can range from immediate vesting, to 100% vesting after 3 years of service, to a vesting schedule that increases the vested percentage for each year of service. An employee who reaches normal retirement age (NRA) is generally entitled to 100% vesting.
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