how vesting works
employees commonly save a percentage of their paycheck into their 401 k s and their employer may match part or all of that contribution employees are always 100 vested in their salary deferral contributions to their retirement plans and sep and simple employer contributions employer contributions to a 401 k plan may vest immediately however a company may set up a vesting schedule to determine when employees acquire full ownership of the contributed portion matched dollars usually take several years to vest meaning an employee must stay with the company long enough to be eligible to receive them vesting within stock bonuses offers employers a valuable employee retention tool for example an employee might receive 100 restricted stock units as an annual bonus to entice this valued employee to remain with the company for five years the stock may vest according to the following schedule 25 units in the second year after the bonus 25 units in year three 25 units in year four and 25 units in year five if the employee leaves the company after year three only 50 units would be vested and the other 50 would be forfeited employee contributions to an employer sponsored retirement plan are always considered 100 vested types of vestingtraditional pension plans might have a five year cliff vesting schedule or a three to seven year graded vesting schedule although an employee may be fully vested in their employer s contributions it does not mean they can withdraw that money whenever they want employees are still subject to the plan s rules which generally require them to reach retirement age before making penalty free withdrawals 