(b)lines Ask the Experts – Maximum Permissible Vesting Schedule for Employer Contributions

“And is it the same for base (discretionary) and matching contributions?  I seem to recall that the maximum changed in recent years, but I am not certain.” 

Stacey Bradford, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer: 

The maximum permissible vesting schedules applicable to defined contribution retirement plans (like a 401(k)/profit sharing plan or 403(b) plan) have changed over the years. Generally, since January 1, 2002, the maximum vesting schedule applicable to matching contributions has been a three-year cliff vesting schedule (100% vesting after three years of service) or a two-to-six year graded vesting schedule (20% after two years plus 20% for each year of service thereafter). 

Discretionary employer contributions remained subject to a maximum five-year cliff vesting schedule or two-to-seven year graded vesting schedule until the Pension Protection Act of 2006 (PPA) amended the vesting rules to apply the same maximum schedules to both types of employer contributions. However, an employer may choose to apply one vesting schedule to the match and a different vesting schedule to the discretionary contributions. For example, matching contributions could be 100% vested immediately but the participant’s discretionary contributions account vests over five years (20% each year).  Of note, certain types of employer contributions (e.g., safe harbor matching contributions) must be 100% vested immediately when made to the plan. 

Defined benefit plans have typically been permitted to have longer, maximum vesting schedules, and for several years now, the maximum schedules have been the five-year cliff vesting schedule and the three-to-seven year graded vesting schedule. But, notably, a defined benefit plan that has a cash balance component is required to vest all accrued benefits (including both the cash balance account and the benefit accrued under a traditional defined benefit formula) after no more than three years of service.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.