“Vesting” in a retirement plan means ownership. This means that each employee will vest, or own, a certain percentage of their account in the plan each year. An employee who is 100% vested in his or her account balance owns 100% of it and the employer cannot forfeit, or take it back, for any reason. Amounts that are not vested may be forfeited by employees when they are paid their account balance (for example, when the employee terminates employment) or when they don’t work more than 500 hours in a year for five years.
An employee's own contributions to the plan (for example, employee elective deferrals deducted from salary) are always 100% vested, or owned, by the employee.
Different vesting requirements apply to employer contributions depending on the type of plan the employer sponsors.
SEP and SIMPLE IRA (and other IRA-based) plans require that all contributions to the plan are always 100% vested.
Qualified defined contribution plans (for example, profit-sharing or 401(k) plans) can offer a variety of different vesting schedules that are determined by the plan document. These can range from immediate vesting, to 100% vesting after 3 years of service (as defined by the plan, generally 1,000 hours worked over 12 months), to a vesting schedule that increases the e mployee’s vested percentage for each year of service with the employer. This sounds easy enough, but it can get complicated. Employers can choose to use different methods of counting service.