"Vesting" refers to the process by which you become the owner of the employer contributions to your retirement plan. If you aren't fully vested in your plan when you leave a job, you forfeit all or a portion of the contributions made by your employer. Companies may use a vesting schedule to encourage employees to stay with the company for several years, rather than leaving after just a year or two, to reduce costs associated with employee turnover.
Vesting only applies to contributions made by your employer to your retirement plan, according to the IRS. Contributions that you make, including payroll deductions, aren't subject to vesting -- they're yours to keep no matter how long you work at the company. For example, if you contribute $2,000 to your 401(k) plan, and leave in the same year you joined, you might not be allowed to keep your employer's matching contribution, but that $2,000 is yours forever.
The first IRS-approved method of vesting is called "graded vesting." Under this method, the employer must vest the employees at least 20 percent per year, starting in the second year, and make employees 100 percent vested after six years. For example, if you left your job after four years, you would get to keep 60 percent of the employer's contributions to your retirement plan.
The other method is called "cliff vesting" because it allows for you to be completely unvested one day, and fully vested the next. Under this option, a company can adopt a plan that vests employees 100 percent after three years, but there's no minimum before then. However, these are just minimums, so your employer could vest you more quickly. For example, a company could vest all its employees after just one year at the company -- or even instantly.
Vesting only applies to certain retirement plans, including 401(k)s and profit sharing plans, notes the IRS. Employers are required to fully vest their employees in the employer contributions made to SEP IRAs or SIMPLE IRAs, no matter how long the employee has been with the company.