Vesting in Stock Options and Pension Plans

What is Vesting?

The term "vesting" refers to the periodic accrual of full ownership of employer contribution benefits through vehicles such as the 401(k), employee stock options plan, or pension plans to name a few.  For example, some employers will grant their employees' restricted stock units (RSU) and make them available on a 4 year vesting schedule.  

Assume that an employee received 100 RSU's; he would assume ownership of 25 units every year.  If the employee leaves the company before all shares have vested, he will forfeit all unvested shares that were granted to him. This is called graduated, or grade, vesting.

The SEP IRA and SIMPLE IRA are exceptions to the rule as they immediately vest thereby giving the employee the upper hand if they choose to leave the employer and take all employer contributions with them, regardless of tenure at the company.

Other Types of Vesting Arrangements

Employers may also choose to use cliff vesting to transfer full ownership of their contributions.  Cliff vesting allows the employer contribution to be 100% vested after a certain period of time.  For example, if a company contributes $3,000 using a 3 year cliff vesting schedule, the employee will vest 100% in 3 years but up until then, not 1% will vest.

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