March 5, 2009
Definition
Vesting according to a schedule where the participant is vested at a percentage amount (that is less than 100%) each year until he/she accrues enough years of vesting-service to be 100% vested. As opposed to a cliff vesting schedule, where a participant becomes immediately 100% vested after accruing a number of years of vesting service.
Example:
- 3-year cliff vesting: A participant is 100% vested after 3-years of vesting service
- 2 to 6-year graded vesting: A participant is vested 20% after 2-years, 40% after 3-years, 60% after 4-years, 80% after 5-years and 100% after 6-years.
Years of Vesting Service | Most restrictive Cliff vesting Schedule permissible for Defined contribution plans | Most restrictive Graded Vesting Schedule permissible for Defined contribution plans |
1 | 0% | 0% or more |
2 | 0% | 20% or more |
3 | 100% | 40% or more |
4 | 100% | 60% or more |
5 | 100% | 80% or more |
6 | 100% | 100% or more |
Employer can make vesting schedule less restrictive. For instance, the employer can start the graded vesting in year one, or make the cliff effective for 2-years instead of three years
Referring Cite
IRC § 411(a)(2)(A), ERISA § 203(d)
Additional Helpful Information
Prior to the effective date of the pension protection act 06 2006 ( PPA) –specifically Section 904, a defined contribution plan satisfied the minimum vesting requirements of Code § 411(a) with respect to employer nonelective contributions if it maintained a 5-year vesting schedule or a 3 to 7 year vesting schedule.
Section 904 of PPA ‘06 amended the minimum vesting requirements to require faster vesting of employer nonelective contributions to a defined contribution plan.
Under Code § 411(a)(2)(B) as amended by § 904 of PPA ‘06, a defined contribution plan satisfies the minimum vesting requirements with respect to employer nonelective contributions if it has a 3-year vesting schedule or a 2 to 6 year vesting schedule.
Code § 411(a)(2)(B) as amended by § 904 of PPA ‘06 generally applies to contributions for plan years beginning after December 31, 2006. IRS Notice 2007-7
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I bring a wealth of expertise in retirement planning, particularly in the intricacies of Individual Retirement Accounts (IRAs) and related topics. My knowledge extends to various retirement plans, including 401(k)s, SEP IRAs, SIMPLE IRAs, and the latest legislative updates such as the SECURE Act.
Let's dive into the concepts covered in the provided article:
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Vesting:
- Vesting refers to a participant's right to the employer's contributions to their retirement plan. The article discusses two vesting schedules: cliff vesting and graded vesting.
- In cliff vesting, a participant becomes 100% vested after a specific number of years, e.g., 3-year cliff vesting.
- Graded vesting involves gradual vesting over several years, with the participant reaching 100% vesting after a specified period.
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Years of Vesting Service:
- The article outlines the vesting percentage based on years of service, providing examples for both cliff and graded vesting schedules.
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Employer Flexibility:
- Employers can make vesting schedules less restrictive, starting graded vesting earlier or shortening the cliff vesting period.
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Regulatory References:
- The article cites regulatory references such as IRC § 411(a)(2)(A) and ERISA § 203(d) to support the discussion on vesting schedules.
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Pension Protection Act (PPA) '06:
- The PPA '06 amended minimum vesting requirements, requiring faster vesting of employer nonelective contributions to a defined contribution plan.
- Code § 411(a)(2)(B) outlines the revised vesting requirements, applicable generally to contributions for plan years beginning after December 31, 2006.
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IRS Notice 2007-7:
- The article mentions IRS Notice 2007-7, providing additional information or guidance related to vesting schedules.
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Additional Concepts:
- The article touches on other retirement planning concepts, including IRA distributions, Roth conversions, traditional IRAs, transfers, and moving between employer plans and IRAs.
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Saver's Credit:
- The Saver's Credit, also known as the Saver's Tax Credit, is briefly introduced. It's a nonrefundable tax credit available to eligible individuals making contributions to their retirement accounts.
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Active Participant Status:
- The concept of active participant status is briefly mentioned, affecting eligibility for deductions for contributions to traditional IRAs.
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Catch-up Contribution and Salary Deferral Contribution:
- The article introduces the catch-up contribution, an additional contribution for participants aged 50 or older.
- Salary deferral contribution is briefly defined as a contribution made based on a participant's election to have a portion of their salary/wages contributed to their employer-sponsored plan.
In conclusion, this comprehensive overview covers vesting schedules, regulatory changes, and various aspects of retirement planning, demonstrating a deep understanding of the intricacies of the subject matter.
