Editing Vesting (section)

==Employment==

===Retirement plans===
Vesting is an issue in conjunction with [[employer]] contributions to an [[employee stock option]] plan, deferred compensation plan, or to a retirement plan such as a [[401(k)]], [[Annuity (financial contracts)|annuity]] or [[pension]] plan.

Once a retirement plan is fully vested, the employee has an absolute right to the entire amount of money in the account.<ref>{{cite book |last1=Joel |first1=Lewin G. |title=Every employee's guide to the law : everything you need to know about your rights in the workplace--and what to do if they are violated |date=1996 |publisher=Pantheon Books |location=New York |isbn=9780679758679 |page=128 |edition=Rev. and updated to include new laws}}</ref> It is a "basic right that has been granted, or has accrued, and cannot be taken away"; for example. one has a right to a vested [[pension]].<ref>Ballentine's Law Dictionary, p. 577 (1991).</ref>

Generally, the portion ''vested'' cannot be reclaimed by the employer, nor can it be used to satisfy the employer's debts. Any portion not vested may be forfeited under certain conditions, such as termination of employment. The portion invested is often determined [[pro-rata]].<ref>{{cite web |title=Retirement Topics - Vesting |url=https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-vesting |website=IRS |publisher=Internal Revenue Service |access-date=16 October 2021 |date=3 June 2021}}</ref>

Generally, for [[retirement plans in the United States]], employees are fully vested in their own salary deferral contributions upon inception.  For employer contributions, however, such as those from an [[employer matching program]], the employer has limited options under the [[Employee Retirement Income Security Act]] (ERISA) to delay the vesting of their contributions to the employee. For example, the employer can say that the employee must work with the company for three years or they lose any employer contributed money, which is known as ''cliff vesting''. Or it can choose to have the 20% of the contributions vest each year over five years, known as ''graduated vesting'' or ''graded vesting''.

Choosing a vesting schedule allows an employer to selectively reward employees who remain employed for a period of time. In theory, this allows the employer to make greater contributions than would otherwise be prudent, because the money they contribute on behalf of employees goes to the ones they most want to reward.

===Ownership in startup companies===
Small entrepreneurial companies (''[[startup]]s'') usually offer grants of [[common stock]] or positions in an [[employee stock option]] plan to employees and other key participants such as [[independent contractor|contractors]], [[board of directors|board members]], [[Advisory board|advisors]] and major vendors. To make the reward commensurate with the extent of contribution, encourage loyalty, and avoid spreading ownership widely among former participants, these grants are usually subject to vesting arrangements.

Vesting of options is straightforward. The grantee receives an option to purchase a block of common stock, typically on commencement of employment, which vests over time. The option may be exercised at any time but only with respect to the vested portion. The entire option is lost if not exercised within a short period after the end of the employer relationship. The vesting operates simply by changing the status of the option over time from fully unexercisable to fully exercisable according to the vesting schedule.

Common stock grants are similar in function but the mechanism is different.  An employee, typically a company founder, purchases stock in the company at nominal price shortly after the company is formed. The company retains a [[Repurchase agreement|repurchase]] right to buy the stock back at the same price should the employee leave. The repurchase right diminishes over time so that the company eventually has no right to repurchase the stock (in other words, the stock becomes fully vested).

Beginning in the 1990s, vesting periods in the United States are usually 3–5 years for employees, but shorter for board members and others whose expected tenure at a company is shorter. The vesting schedule is most often a [[pro-rata]] monthly vesting over the period with a six or twelve month cliff. Alternative vesting models are becoming more popular including milestone-based vesting and dynamic equity vesting.<ref>{{Cite news|url=http://slicingpie.com/bootstrapper-equity-why-time-based-vesting-is-a-waste-of-time/|title=Perfect Equity Splits for Bootstrapped Startups|work=Slicing Pie|access-date=2017-09-29|language=en-US}}</ref>

In the case of both stock and options, large initial grants that vest over time are more common than periodic smaller grants because they are easier to account for and administer, they establish the arrangement up-front and are thus more predictable, and (subject to some complexities and limitations) the value of the grants and holding period requirements for tax purposes are set upon the initial grant date, giving a considerable tax advantage to the employee.

=== Profit sharing plans ===

[[Profit-sharing]] plans are usually vested in ten years, although in some cases a plan may serve essentially as a pension by allowing a limited amount of vesting should the employee retire or leave on good terms after an extended period of employment.