Can ESOPs contain vesting provisions?
Yes. An ESOP must comply with one of two minimum vesting schedules under ERISA: (1) 100 percent vesting after five years of service or (2) 20 percent vesting per year beginning in year three and continuing through year seven. For plan years beginning on or after 1/1/07, the ESOP must comply with vesting provisions under the Pension Protection Act of 2006 (PPA) in that 100% vesting will occur after three years of service or 20% per year beginning in year two and continuing through year six. An exception to this is that leveraged ESOPs with a loan in place on September 26, 2005 may continue to use the five-year cliff or seven-year graded schedule until the plan year in which the ESOP loan is fully repaid.
