How Does Graded Vesting Work?

[JGB]

My new company follows a graded vesting schedule for employer match. From my research, it appears that they are on the slowest schedule legally allowed:

• 20% after 2 years
• Then an additional 20% every year to reach 100% after 6 years

Vesting for the employer match with my previous employers have always been on cliff vesting: after a set amount of time working, everything (past and future) is vested.

The difference here has me seeking clarity about one point: At the point that vesting has occurred, does that vesting level apply to all contributions, or just the contributions that have been in the account for the requisite period of time?

Specifically, at the 6 year mark, does hitting 100% mean that the entire match received at any point is completely vested? Say the match equates to 2k per year. After 6 years, do I have 12k (plus earnings) vested, or 2k + .8*2k + .6*2k + .4*2k + .2*2k (plus related earnings)?

[Cheddar Stacker]

Specifically, at the 6 year mark, does hitting 100% mean that the entire match received at any point is completely vested?

Yes. The DOL and ERISA will not allow anyone running a qualified plan to have a vesting schedule worse than yours. Many employers pick this one for obvious reasons, but ALL employer contributions from year 0 to year 15 will be fully vested as soon as you reach 100% vesting on your 6th anniversary.

[mak1277]

I would argue that graded vesting is better than cliff vesting.  Every company I've ever worked for has had cliff vesting after 5 years of employment, so if you leave before then you don't get any company match at all.  I'd much prefer graded vesting where at least you're vesting in a piece of the match each year (even though it will take you 6 to get to 100%).

[JGB]

I would argue that graded vesting is better than cliff vesting.  Every company I've ever worked for has had cliff vesting after 5 years of employment, so if you leave before then you don't get any company match at all.  I'd much prefer graded vesting where at least you're vesting in a piece of the match each year (even though it will take you 6 to get to 100%).

The companies I've been at were on a 3-year to 100% timeline. 5-years is definitely worse than the 6-year graded vesting that I am seeing.

They are kind of odd in how they define a year too -- any calendar year in which you work more than 1000 hours. So someone could be a bit screwed if they came in during the third quarter of the year, as their timeframe wouldn't start until the first of the calendar year following when they actually started. I'm getting the benefit here though, as I started in May (meaning that I get a full year of credit for 7 months of working).

I'm not sure if I could leave in year "6" after working for 1000 hours and still have 100% or if I'd have to be there through the end of the calendar year...

The bad (good?) news is that I'd never really even entertained the idea that I might stick with this company that long before I FIRE. Now I guess I'll have to weigh the impact of vesting in with my other plans and calculations.

[Cheddar Stacker]

I'm not sure if I could leave in year "6" after working for 1000 hours and still have 100% or if I'd have to be there through the end of the calendar year...

I'm fairly certain you can. When you get close if you are still working check in with the TPA (third party administrator) and ask them. If you have online access to your accounts this would be where you ask. They are required to follow all ERISA rules, and 1000 hours is the threshold for qualifying for a lot of things. So 2014 is year 1, and 2019 is year 6 as long as you work 1000 hours in 2019.

[JGB]

I'm not sure if I could leave in year "6" after working for 1000 hours and still have 100% or if I'd have to be there through the end of the calendar year...

I'm fairly certain you can. When you get close if you are still working check in with the TPA (third party administrator) and ask them. If you have online access to your accounts this would be where you ask. They are required to follow all ERISA rules, and 1000 hours is the threshold for qualifying for a lot of things. So 2014 is year 1, and 2019 is year 6 as long as you work 1000 hours in 2019.

Good to know. Thanks!

[kkbmustang]

I would argue that graded vesting is better than cliff vesting.  Every company I've ever worked for has had cliff vesting after 5 years of employment, so if you leave before then you don't get any company match at all.  I'd much prefer graded vesting where at least you're vesting in a piece of the match each year (even though it will take you 6 to get to 100%).

Actually, the longest cliff vesting period NOW is 3 years. It used to be 5 years (prior to 1/1/2007).
See http://www.dol.gov/ebsa/faqs/faq_compliance_pension.html

They are kind of odd in how they define a year too -- any calendar year in which you work more than 1000 hours. So someone could be a bit screwed if they came in during the third quarter of the year, as their timeframe wouldn't start until the first of the calendar year following when they actually started. I'm getting the benefit here though, as I started in May (meaning that I get a full year of credit for 7 months of working).

I'm not sure if I could leave in year "6" after working for 1000 hours and still have 100% or if I'd have to be there through the end of the calendar year...

I don't think you're reading the plan's requirements correctly. There are multiple purposes for which the year of service terminology is used and you need to make sure you are attributing the year of service for vesting purposes correctly. The year of service concept is used for eligibility as well.

With respect to VESTING, hours of service can be calculated based on actual hours worked, an equivalency method or by an elapsed time method. You should confirm which of these methods your employer uses. Assuming it's the actual hours worked method, then in 2014 you would need to work 1,000 hours (including time before you were eligible for or participating in the plan). Then again in 2015, 2016, 2017, 2018 and 2019. In 2019, you could work 1,000 hours and then leave the company and be fully vested.  Also, there are certain situations in which the company must fully vest regardless of how many years of vesting service you had (for example, plan termination).

If you want your eyes to glaze over, go here: http://www.irs.gov/pub/irs-pdf/p6389.pdf

For the FIRST YEAR ONLY, you have to work 1,000 hours during your first vesting computation period (a year) which begins on your date of hire. So, that third quarter person would have 365 days to get 1,000 hours of service FOR VESTING PURPOSES and for the first year. Then, in subsequent plan years (which aren't necessarily calendar years), the plan year would be used for determining whether a person satisfied the 1,000 hours of service requirement. In other words, it shifts after the initial year (third quarter year 1 to third quarter year 2) to the plan year (if it's a calendar year plan year it would be 1/1 to 12/31 for each subsequent vesting year).

See here: http://erisadiagnostics.com/wp-content/uploads/servicecrediting.pdf

[geekette]

This explains something I'd wondered about!

DH briefly worked for a company with a three year vesting schedule.  A month in 2011, all of 2012, and 8 months in 2013.  I was surprised that he is 66% vested, having not worked 2 full years, but now I see - he did work 1000 hours that last year, so question answered!  Thanks!