 Sam
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 Posted: Thu Apr 15, 2004 12:42 am Post subject: Vesting |
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As defined by law, vesting is to provide an immediately secured right of present or future enjoyment. An individual has the right to a vested asset which a third party cannot take away. The concept of vesting is valid in case of inheritance and retirement plan laws.
A person may get a life interest in the property, with the remaining portion offered to other individuals. But if the beneficiary of the remaining part is unknown, then the remainder is said not to have vested, rather it is said to be contingent. This may occur in case of entailed estates, or when the property is left in trust for a child or relative without heirs.
Vesting is an issue connected to employer contributions to an employee stock option plan or to a retirement plan such as 401(K), annuity or pension plan. The employer cannot reclaim the part vested nor can he use it to satisfy the employer's debts. Any part which is not vested may be forfeited under conditions like termination of employment.
In case of retirement plan in the United States, employees are 100% vested in their salary deferral contributions. For the employer contributions, the options are limited under the Employee Retirement Income Security Act (ERISA) to delay the vesting of their contributions to the employee. For instance, the employer can demand that the employee work for 3 years or they shall lose any employer contributed money, which is cliff vesting.
Example: Suppose that you will be taking a loan from your 401(K) Plan. The maximum loan amount under the law is one-half of your vested balance in the plan, or $50,000, whichever is the lesser amount. In case you have less than $20,000 in your plan, then your limit will be the amount of your vested balance, but not more than $10,000. Your employer fixes upon the maximum term, minimum loan amount, interest rate and the applicable loan fees. You must repay the loan within a reasonable amount of time. |
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