How do the ESOP participants become vested in their ESOP accounts?
As with all tax-qualified retirement plans, ESOPs must comply with one of two minimum vesting schedules established in the Code. In a “cliff vesting” plan, a participant must be 100 percent vested after five years, but need not be vested at all before that time. In a “graded vesting” plan, a participant must become 20 percent vested after three years and the vested percentage must increase 20 percent annually thereafter until 100 percent vesting is reached after seven years. Effective in 2007, the graded vesting period changes to six years and the cliff vesting alternative becomes three years. A vesting schedule which provides for more rapid vesting than these minimums is permitted. Participants must become fully vested when they reach normal retirement age, as defined in the ESOP. Vesting is normally calculated using years of service with the employer, including service with affiliated employers within a controlled group. Credit for service before the ESOP was adopted may (but need no
