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Faster Vesting for Profit Sharing Plans

The Pension Protection Act of 2006 will shorten the length of time required to vest in the contributions that employers make to profit sharing and certain other defined contribution plans.

Currently, employees can forfeit all employer contributions to most private retirement plans if they work for an employer (or employers) contributing to the plan for fewer than five years. There is an exception for employer-matching contributions to 401(k) plans, which typically vest after three years. (Employee contributions can never be forfeited.)

The Act will change the vesting rules for defined contribution plans. Plans will be required either to fully vest employer contributions after three years, or to provide partial vesting after the second year of work, and then increase the percentage each year, until employees become 100% vested in year six. For most defined benefit plans the five-year vesting rule (or the alternative seven year “graded” vesting rule) would remain in effect.

The new law takes effect in 2007.

Read Section 904 of the Pension Protection Act of 2006 Public Law 109-280