Employee Benefits Strategies

Qualifying for Benefits

New employees are not automatically eligible for benefits the day they are hired. Usually there is a waiting period that must be satisfied. For example: New employees may not be eligible to enroll in an employer's health insurance program until they have worked 30 days at the organization. Another common (and complex) example is the vesting period for a retirement program.

Vesting

The term vesting means that the employee has an interest in the accrued benefits of the retirement plan program. These benefits can't be taken away even if the employee quits or is fired. This is a requirement of the 1974 Employee Retirement Income Security Act, or ERISA. ERISA became law to prevent organizations from avoiding retirement plan payouts by letting people go before reaching retirement age. It also prevents employees from being forced to stay of their working lives with a particular organization to receive their retirement benefits.

Employees are always immediately 100% vested in their own contributions to a plan. It is the employer contribution that may have a delayed ownership requirement.

ERISA requires employers to adopt one of two vesting schedules for 401(k) plans or use their own more generous schedule.

• 3-year cliff vesting: 0% vested for less than 3 years of service; 100% vested after 3 years.
• 6-year graded vesting: at least 20% vested at the end of the second year of service with increases of 20% each year, until the employee is fully vested by the end of the 6th year of employment.

If an organization automatically enrolls its employees in a 401(k) plan and the plan requires employer contributions, employees vest in those contributions after 2 years.

For defined benefit plans, an organization can use any of two vesting methods required under ERISA or use their own more generous schedule.

1. 5-year cliff vesting: 0% vested for less than 5 years of service; 100% vested after 5 years.
2. 7-year graded vesting: 0% for years 1 and 2; 20% vested after year 3, plus an additional 20% each subsequent year until 100% vested after 7 years.