What is a ‘Vested Benefit’
A vested benefit is a financial incentive of employment that an employee is fully entitled to. Employers sometimes offer their employees benefits that they acquire full ownership of gradually or suddenly, as they accumulate more time with the company. This process is called graduated vesting or cliff vesting, and its purpose is to give employees a reason to stay with the company long term. When the employee has earned full rights to the incentive after a predetermined number of years of service, those benefits are called fully vested.
BREAKING DOWN ‘Vested Benefit’
An example of a type of benefit that might vest gradually is shares of the company’s stock. An employee might be awarded 100 shares of stock as a performance bonus after year one of employment. Under a graduated vesting plan, the employee might acquire full ownership of 20% of the shares after year two, 40% after year three, 60% after year four, 80% after year five and 100% after year six. The stock bonus would be a partially vested benefit in years two to five, and a fully vested benefit after year six.
Ways Vested Benefits are Applied
Vested benefits can also refer to other types of benefits such as 401k programs, retirement plans, and pensions. The Employee Retirement Income Security Act provides protections to employees to guarantee access to the benefits that have vested after they have worked at a job for the prescribed period of time. Depending on the type of benefit, the time for full vestment can vary. For example, a 401k program vests as soon as an employee begins to participate, which means they will be able to access the full amount of money they put towards that account at any time they leave the company. If the benefits program includes contributions by an employer, such as matching funds put towards a 401k plan, there may be a minimum required time frame the employee must work before that portion of the funding becomes vested.
The precise structure of a vested benefit program might be negotiated as part of a collective bargaining agreement or laid out during the hiring process with new employees. As more employees earn vested benefits, the amount of funding that an organization is required to put towards these benefits can create more liabilities for companies. They can be required to report the amount of the obligation being carried for such vested pension benefits at the end of accounting periods.