Understanding Vesting Rules – Ask HR Bartender
My first human resources job was working in benefits to calculate vesting for the employee stock ownership plan (ESOP). Today’s reader note brought back some memories.
Does accrued time off move the calendar forward for stock vesting purposes when resigning? For example, monthly stock vesting is the 30th of each month.
On Jan 1, I give my 2 weeks notice. I have 16 days of time off remaining when I give my notice.
Would I forward vest an additional month stock?
To help answer this question, I reached out to Belinda Morgan, a partner with the firm Foley & Lardner, LLP. Belinda focuses her practice on the areas of employee benefits and ERISA work.
For our readers who might not be aware, what’s a vesting rule?
[Belinda] ‘Vesting’ refers to an employee’s ownership rights in contributions to an employer-sponsored retirement plan, to stock options, or to other similar benefits.
There are 3 basic types of vesting:
Immediate vesting – where the employee is immediately treated as the owner of any contributions to the plan or other plan benefits;
Graded vesting – where the employee’s ownership of any contributions or benefits gradually increases over time, eventually reaching 100% by the end of the vesting period; and
Cliff vesting – where the employee is entitled to full ownership of any contributions or benefits after the vesting period passes, but has no ownership rights at all before that time.
Employees are always 100% vested in their own salary deferrals to tax-qualified employer-sponsored plans (such as 401(k) plans). An employer’s contributions to the plan, on the other hand, may be subject to some form of vesting.
Can you give us an example?
If the employee leaves the company after 3 years, she’d be entitled to receive 100% of her own elective contributions to the plan and 60% of the employer’s matching contributions (which vested 20% each year over the 3 years she was employed). She’d also be entitled to receive any earnings on those amounts. The employee would forfeit, however, the remaining 40% of the employer matching contributions that hadn’t yet vested, along with any related earnings.
Why do vesting rules exist?
[Belinda] Employers generally impose a vesting requirement as a means to encourage employee loyalty. A vesting schedule acts as an incentive for employee to remain employed with the employer – the longer the employee works, the more of the employer’s contributions, stock options, etc., he’s entitled to keep.
We can’t tell from the story if the reader is referring to stock options, an employee stock ownership plan (ESOP), or a 401(k) type plan. But any kind of retirement or pension plan has vesting rules, correct?
[Belinda] Yes, that’s right. As noted above, though, in some cases (such as an employee’s own 401(k) contributions), the plan’s rule may simply be that employees are immediately vested in any contributions or other plan benefits. Although an employer generally determines what form of vesting (if any) will apply to a plan or arrangement, the Internal Revenue Code may place limits on the options available to the employer.
As a general rule, does an employee’s accrued time off impact vesting rules?
[Belinda] Typically, no. In most cases, vesting ends on the date the employee’s employment terminates. That said, an employer could certainly design a plan to apply the employee’s accrued time off towards the employee’s vesting. There’s no requirement, however, for an employer do so.
In situations like the one described above, if permitted, an employee might consider taking any accrued vacation before resigning in order to obtain additional vesting credit. Whether doing so would be helpful to the employee (or even permitted by the employer), however, will depend on the terms of the underlying plan or other applicable agreements, the employer’s administrative requirements and procedures, and the employee’s own circumstances.
Where can an employee go to find out the vesting rules for their plan?
[Belinda] The best place to start would be with the plan’s summary plan description (SPD). The plan’s vesting requirements must be included in the SPD. The grant agreement related to any stock option arrangement might also contain vesting information.
The actual plan documents for the plan or arrangement may also be helpful, although they’ll usually be written in a much more formal manner than the SPD is. Employees can also speak with their employer’s HR contact for additional information about their plan’s vesting requirements.
My thanks to Belinda for sharing her expertise. Vesting rules and plan benefits can be very complex. If you want to learn more, check out the Foley & Lardner blogs.
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