Vesting
The process by which an employee earns full ownership of employer contributions or equity over time.
What is Vesting?
Vesting is the process by which an employee gains full, non-forfeitable ownership of employer-contributed assets — such as 401(k) employer matches, pension benefits, or equity compensation (stock options and RSUs) — over a specified period of time or upon meeting certain milestones. Cliff vesting grants 100% ownership after a set period (e.g., 2 years). Graded vesting gradually increases ownership percentages (e.g., 20% per year over 5 years). If an employee leaves before full vesting, they forfeit unvested employer contributions. Employee contributions to 401(k)s are always 100% vested immediately.
Example
An employer offers a 4-year graded vesting schedule on a $10,000 annual 401(k) match: 25% vested after year 1, 50% after year 2, 75% after year 3, 100% after year 4. An employee leaving after year 2 keeps only $5,000 of each year's match.
Source: IRS — Vesting in Employer Plans