Definition

• Vesting is the time period during which you receive employer benefits but would lose them if you left the company. For example, if you received a $2,000 matching contribution to your 401k plan but the next year left the company and you were not vested, you would not get to keep the $2,000.
  
  

Types

• Vesting is commonly required for matching retirement plan contributions on 401k plans and stock options. However, employers cannot require a vesting period for SEP IRA plans.
  
  

Significance

• Vesting requires the person to work for a company for several years before being able to keep the extra benefits in order to decrease turnover. When people have a financial incentive to stay, they are less likely to leave the company after only a year or two.
  
  

Function

• Vesting can be a gradual process or can be complete. For example, one company may vest at 20 percent per year for five years, which would mean if you left after three years you could keep 60 percent of the accumulated benefits. Another company may completely vest you after four years so if you left after three years you would get nothing but if you left after four years you would get everything.
  
  

Misconceptions

• If you put your own money into your 401k plan or any other retirement plan, that money is not subject to vesting. Only employer contributions can be withheld from someone who is not vested.