What is Vesting?

In finance, vesting has to do with the incremental process of obtaining a full right or privilege to a resource that will be of use in the future. Understanding the concept of vesting can best be achieved by relating the action to various types of retirement plans, including employee stock ownership plans and pensions. In most cases, the vesting takes place according to the guidelines that are put in place by the employer.

Vesting is commonly an incremental process that is based on the length of time that the employee has been with the company. For each year of employment, the employee receives a percentage of credit toward full vesting. The amount of vesting that is extended for each continued year of employment will vary, depending on company procedures and national laws that govern the operation of compensation plans for employees.

In the United States, any form of vesting related to retirement and employee stock plans must comply with the conditions outlined in the Employee Retirement Income Security Act, or ERISA. The regulations contained within this act help to maintain a degree of fairness for both employee and employer. For example, the employee must remain with the company for an equitable amount of time, or he or she will lose all vesting in the retirement or pension fund. The same is true with any annuity or profit-sharing plan as well. At the same time, the employer must work within a specified set of options when it comes to setting the terms and conditions for vesting.

Vesting normally involves employer-matched contributions to the retirement plan. If the employee leaves the company for any reason before becoming fully vested, he or she will normally lose those matched benefits. The employee may still be able to receive any contributions that he or she paid into the plan.