What Does It Mean to Be 100% Vested?

Vesting in employer-sponsored benefit plans establishes an employee’s ownership of contributions made by their employer. When an individual becomes 100% vested, they have complete and irrevocable ownership of all employer-contributed funds in their retirement or other benefit accounts. This means the employee is entitled to these funds, even if their employment with the company ends.

Understanding Vesting

Vesting refers to the legal right an employee gains over employer contributions to a retirement plan, such as a 401(k) or pension. Vesting schedules encourage employee retention and incentivize long-term service by requiring employees to remain with the company for a certain period before fully owning employer contributions.

There are two common types of vesting schedules: cliff vesting and graded vesting. Under a cliff vesting schedule, an employee gains 100% ownership of employer contributions all at once after completing a specific period of service, typically ranging from one to three years. If an employee leaves before this period is complete, they forfeit all employer contributions.

Graded vesting, in contrast, allows employees to gain ownership of employer contributions incrementally over several years. For instance, an employee might become 20% vested after two years of service, 40% after three years, and so on, reaching 100% after five to seven years.

Achieving 100% Vesting

Reaching 100% vesting depends on the specific schedule adopted by the employer’s plan. Under a cliff vesting arrangement, an employee becomes 100% vested on a specific date, such as an employment anniversary. All employer contributions become fully owned by the employee at once.

For plans with a graded vesting schedule, achieving 100% vesting occurs gradually over time. An employee accrues a larger percentage of ownership with each additional year of service, eventually reaching full ownership after the maximum vesting period, which is commonly five to seven years. Any contributions an employee makes from their own salary are always 100% vested immediately. Some plans, particularly those that are not subject to standard Employee Retirement Income Security Act (ERISA) rules, may also offer immediate 100% vesting of employer contributions, although this is less common for typical retirement plans.

Implications of 100% Vesting

Being 100% vested means an individual has an unqualified right to all employer contributions in their benefit account. These funds are considered fully theirs, regardless of future employment status with that company.

Upon becoming 100% vested, an employee can typically roll over these funds into another qualified retirement account, such as an Individual Retirement Account (IRA) or a new employer’s retirement plan, if they change jobs. While the funds are fully owned, withdrawing them directly before retirement age can incur significant financial consequences. Such early withdrawals are typically subject to ordinary income taxes and may also face an additional 10% early withdrawal penalty, unless a specific exception applies. Full vesting ensures that the employer’s contributions remain accessible for an employee’s long-term financial planning, even after they depart from the company.