What is vesting and why does it matter?

What is vesting?

Think of vesting as a length of time—for example, six months—that you become entitled to the money your employer added to your savings, known as employer contributions.

Contributions vest immediately in a group Registered Retirement Savings Plan (RRSP), Tax Free Savings Accounts (TFSA), and non-registered savings plans (NRSP). This means there is no vesting period.

This isn't the case for all types of savings plans. Canada Revenue Agency (CRA) has rules for group Deferred Profit-Sharing Plan (DPSP) and requires the vesting period be a maximum of two years of membership in the plan. Workplaces can choose a vesting period, as long as it meets the CRA rules. For example, employer contributions may vest after one year of employment. This means if you leave the plan after working for one year, you’re entitled to the full financial benefit.

Each province has its own requirements for vesting for pension plans. In provinces where vesting isn't required to be immediate (New Brunswick, Newfoundland, and Saskatchewan), your workplace plan may offer better vesting periods. For example, employer contributions may vest after only three months of employment. This means if you leave the plan after working for three months, you’re entitled to the full financial benefit.

What are typical vesting periods?

Depending on the type of plan, employers can decide to make the financial benefit available right away or over time. The most common types of vesting are immediate, graded, and cliff.

1. Immediate vesting—You're entitled to employer contributions right away.
2. Graded vesting—This is also known as rolling vesting. You have gradual entitlement to employer contributions over time. For example, you might be entitled to 50% of the employer contributions after six months of employment and full entitlement after one year.
3. Cliff vesting—There is no gradual entitlement to employer contributions. A one-year cliff in a pension plan, for example, would mean that you aren't entitled to employer contributions until you've worked there for one full year.

If you're considering making a withdrawal (where allowable), or leaving your job, you'll be entitled to employer contributions according to the vesting rule:

1. If your plan has immediate vesting, you'll be entitled to the full financial benefit.
2. If your plan has graded vesting based on length of employment, you'll receive the portion of employer contribution that lines up with your length of your employment. If 50% of the employer contributions vest in one year and fully vests in two years, you won’t be entitled to employer contributions if you leave in the first year. You'll be entitled to 50% of employer contributions if you leave between one year and two years. You'll be entitled to the full financial benefit the day after two years.
3. If your plan has cliff vesting, and the cliff is one year, you won’t be entitled to employer contributions if you leave before you hit your one-year anniversary,  but after that, you'll be entitled the full financial benefit.

Check your vesting rules

Whether you're considering a withdrawal (where allowable) or leaving the company, make sure you know what the different vesting rules are in your workplace plans. If you don't time your departure thoughtfully, you could end up leaving some money on the table.