Advanced Diploma of Financial Planning (ADFP) Practice Test

An employee is considered vested in a qualified retirement plan when they have ownership rights to contributions made by the employer. Vesting refers to the process by which an employee earns the right to keep their employer's contributions to their retirement plan, even if they leave the company.

This ownership can occur based on a specific schedule defined by the retirement plan. For instance, a plan may have immediate vesting, where employees own all contributions from the moment they are made, or gradual vesting, which grants employees full ownership after a certain number of years of service, such as a five-year or seven-year period.

Being vested means that the employee has a legal right to the benefits contributed by the employer, which is an important aspect as it motivates employees to remain with a company and contributes to their financial security in retirement. Other contexts, such as reaching a certain age or length of service, might influence pension benefits but do not define the concept of vesting itself.