A vesting period, when mentioned in reference to retirement plans, is the length of time an employee must work for a company before he or she can claim 100% of employer provided benefits. The term vesting period is most commonly used with retirement plans like a 401(k) or pension, but may also be used with stock options.
Example: My current employer requires that I work five years before I am 100% vested in my 401(k). This means if I leave and go to another company before that time I will forfeit my right to the employer contributions made to my 401(k). It doesn’t however mean I forfeit 100%, my company has an incremental vesting period, meaning each year I work for them my vested percentage increases.
- 2 years: 40%
- 3 years: 60%
- 4 years: 80%
- 5 years: 100%
Each company is different however and for some it may be 0% until the vesting period elapses.
Let’s say I leave my current company after 3 years, and up until that point I have contributed $5,000 to my 401(k) which my employer has matched, giving me total of $10,000 (not counting any gains or losses). When I officially leave my 401(k) will be reduced to $8,000 in total, I would only be entitled to keep 60% of the company match or $3,000 ($5,000 x 60%) in addition to what I have contributed.
Note that vesting only applies to contributions from your employer, everything you contribute you keep. Any gains incurred because of the employer contribution are also forfeited but any gains on your contribution or vested amount is yours to keep