Vesting gives an employee rights to employer-provided assets over time, which gives the employee an incentive to perform well and remain with the company. The vesting schedule set up by the company determines when the employee acquires full ownership of the asset. Generally, non-forfeitable rights accrue based on how long the employee has worked there.
Read more: Vesting Definition | Investopedia
If an employee is vested it means that at least some of the retirement plan or stock options belongs to the employee and not the employer. This is the amount an employee is entitled to take when the employee leaves their employer. The portion that is vested comes from two sources:
- Employee contributions vest immediately. When an employee leaves his employer, he or she is entitled to 100% of his or her contributions plus any earning on those contributions.
- Employer contributions vest over a period of time. There are multiple types of vesting structures that can be adopted by a retirement or stock option plan. Graded vesting schedules allow for a portion of the funds to vest each year over a set number of years. Cliff vesting schedules provide a vesting of 100% of benefits after a set period of time.
How does vesting affect my asset division in divorce?
A benefit does not have to be vested to be considered an asset subject to division in your divorce but it does mean the funds may not be immediately available for you to spend. Unvested assets such as stock options, restricted stock units, pensions and other executive compensation must be handled carefully in legal agreements and long after the divorce is final. It is helpful to utilize a Certified Divorce Financial Analyst or other specialized financial professional to assist in handling these calculations. The agreements typically require the deferred division of these unvested assets meaning the employee spouse must maintain the benefits for their former spouse and the former spouse must be diligent in watching for vestings long after the divorce is finalized.
Susannah Malek is a Certified Divorce Financial Analyst (CDFA) in San Rafael.
photo credit: David Buscho