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An employer has the option of applying a 6-year graded vesting schedule to discretionary company match and profit sharing contributions. With a vesting schedule in place, the employee has to work 6 years before they fully “own” those discretionary company contributions and associated earnings. If the employee leaves and withdraws the retirement account before they have completed the full 6 years, the unvested funds in the account will be forfeited. The forfeited funds will be held in the plan until the following year when they can be used to fund additional company contributions. Unvested funds are not sent back to the employer, but remain in the plan as a credit that the employer can use toward future contributions.

The alternative is having all company contributions 100% vested at the time that they are contributed. With immediate vesting, the employee doesn’t have to work any minimum amount of time to fully “own” the company contributions in the account.

A vesting schedule can promote longevity in your workforce, since it encourages folks to stick around at least 6 years to become fully vested. However, it can be less attractive to potential recruits who are new to the workforce or who don’t expect to be around for 6 years.