Certified Plan Sponsor Professional (CPSP) Practice Exam

A vesting schedule in which participants may be 0% vested after two years is known as what type of schedule?

1. Graded vesting schedule

2. Immediate vesting schedule

3. Cliff vesting schedule

4. Partial vesting schedule

The correct answer is: Cliff vesting schedule

A vesting schedule where participants are 0% vested after a specific period, such as two years, is known as a cliff vesting schedule. In this type of vesting arrangement, employees do not accrue any ownership of the employer's contributions until they reach a defined milestone, commonly a certain number of years of service. Once participants reach this milestone, they become fully vested all at once, which is the "cliff." This contrasts with graded vesting schedules, where employees gradually earn rights to the employer's contributions over time instead of receiving them all at once after a specific threshold is met. Immediate vesting allows employees to have full rights to contributions immediately, and partial vesting typically refers to gradual vesting that does not fit neatly into a cliff or immediate category. Thus, the cliff vesting schedule distinctly describes the situation where participants are entirely unvested until a definitive duration, after which they become fully vested.