What Is a Vesting Schedule and How Does It Work?

Today, employers are looking for creative approaches to keep their workers in their businesses. It has not been a more accessible experience in the entire business sector as companies feel they’ll lose their workers due to competition and the changing labor market. That is why companies are actively looking for creative ideas to remain relevant in the labor market. One of the approaches employers are paying attention to is the vesting schedule.

What Does Vesting Mean?

It is a policy that requires an employee to work for a certain period before becoming fully vested in their employer-sponsored benefits plan. It is also known as a cliff vesting. The most common form of this schedule is when an employee has to stay with a company for five years to be eligible for the complete benefits package.

If an employee leaves the company before the five years are up, they will forfeit their benefits. The cliff vesting schedule is usually implemented to keep critical employees from going to a different company.

How Does a Vesting Schedule Work?

This method works because there is a certain percentage that the employee becomes vested each year. For example, if an employer has a vesting schedule of 20% per year, the employee will be fully vested after five years.

However, if the employee leaves the company before the five years are up, they will only receive the percentage that they have accrued. So, in our example, if the employee leaves after two years, they will only receive 40% of the benefits package.

Vesting schedules can be a great way to keep employees at a company for a more extended period. However, it is vital to ensure that the vesting schedule is fair and equitable for both the employer and the employee.

What Are the Different Types of Vesting schedules?

There are several types of vesting schedules that employers can use, and each has its advantages and disadvantages. The most common vesting schedule is the cliff vesting schedule, which requires an employee to stay with a company for a certain period before they are fully vested in their benefits package.

While this type of vesting schedule can effectively keep employees at a company, it is crucial to ensure that the schedule is fair and equitable for both the employer and the employee.

Another type of vesting schedule is the graded vesting schedule, which allows employees to become fully vested in their benefits package over some time. For example, a company may have a graded vesting schedule of 20% per year, which means that an employee would be fully vested after five years.

This type of vesting schedule can be advantageous for both the employer and the employee. It gives the employer some flexibility in how long they require an employee to stay with the company. It also allows the employee to become fully vested in their benefits package.

Bottom line

A vesting schedule is a policy that requires an employee to work for a certain period before they can become fully vested in their employer-sponsored benefits plan. The most common vesting schedule is the cliff vesting schedule, which requires an employee to stay with a company for a certain period before they are fully vested in their benefits package. Work with Fiduciary Advisors, LTD, and get more information about vesting schedules.