Vesting is defined as the secured right that a person gets as a result of any present or future deployment. Once a person (be it an employee or anyone) gets the vesting rights no third party can take that away from him, it can only be transferred from that person to someone else. In HR context this term is widely used when we discuss about the retirement plans.
When we talk about retirement plans the concept of vesting comes into picture. Vesting is a term which is used when we are describing a situation where in each employee will vest certain % of their salary in some or the other plan every year. He always has the option of taking back the vested amount whenever he wants to. Even the amount which the employee hasn’t vested may also be taken back (but only at the time of termination/culmination of his job). There are two parts which can be vested by an employee namely, employee and employer contribution respectively.
An employee’s own contribution is always vested 100%, it’s something which is owned by the employee. But this is not the case with the employer vesting options, depending on the employer’s sponsorship plan for e.g. SEP and SIMPLE IRA and other techniques which are based on IRA are some plans which are vested 100%. Vesting plans are also referred to as contribution plans, because such plans offer a scheduled vesting schedule which is documented.
Example. An employer XYZ sponsors a profit sharing plan, the plan involves vesting only from employer’s end with a tenure of six yrs and counts the number of hours for which the investment is being vested upon in a particular calendar year. Alice started her job as an operator with this firm in July 2008 and quit the job in September 2012, she worked for around 1000 hrs which was the minimum number of hours which she needed to put in a year, she had four years of vesting time and around 75% of the amount is vested in her account.
Types of Vesting
a) Immediate Vesting: Herein the employee is the immediate receiver of the contribution that he has made and also in simple terms we can say that he is the owner of the contributions to the plan.
b) Cliff Vesting: Here the employee gets the full ownership of the contributions or the benefits which gradually increases with the passage of time. At the end of the vesting period the amount recovered is 100%.
c) Graded Vesting: Here the employee’s ownership towards the contribution made by him keeps on increasing gradually eventually reaching the 100% mark by the end of vesting period.