Vesting
From Wikipedia, the free encyclopedia
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For a vested interest in the nature of supporting a particular outcome for reasons of self-interest, see Vested interest. For the garment, see Vest.
In law, vesting is to give an immediately secured right of present or future enjoyment. In plain English, one has a right to a vested asset that cannot be taken away by any third party, even though one may not yet possess the asset. When the right, interest or title to the present or future possession of a legal estate can be transferred to any other party, it is termed a vested interest. The concept can arise in any number of contexts, but the most common are inheritance law and retirement plan law. In real estate to vest is to create an entitlement to a privilege or a right. For example, one may cross someone else’s property regularly and unrestrictedly for several years, and that person’s right to an easement becomes vested. The original owner still retains the possession, but can no longer prevent the other party from crossing.
Some bequests do not vest immediately upon death of the testator. For example, many wills specify that an heir who dies within a set period (such as 60 days) is not to inherit, and further specify how the corresponding share is to be distributed. This is generally done to obviate disputes over the precise time of death, and to avoid paying taxes twice in rapid succession should multiple members of a family die in the wake of a disaster. Such a bequest does not vest until the expiration of the specified period, because the actual heir cannot be determined with certainty.
It is also possible to give a person, A, a life interest in a property, with the remainder to go to another person or persons, B. If the beneficiary of the remainder cannot yet be known, then the remainder is said not to have vested, and the remainder is said to be contingent. This may happen with entailed estates, or when property is left in trust to care for a child or relative without heirs. (See trust law for details.)
Vesting is an issue in conjunction with employer contributions to an employee stock option plan, or to a retirement plan such as a 401(k), annuity or pension plan. 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.
For retirement plans in the United States employees are immediately 100% vested in their own salary deferral contributions. For employer contributions, 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.
Choosing a vesting plan allows an employer to selectively reward employees that 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.
