Certified Plan Sponsor Professional (CPSP) Practice Exam

What are the two types of permitted vesting schedules in a defined contribution plan?

1. Immediate and graduated

2. Cliff and graded

3. Standard and custom

4. Simple and complex

The correct answer is: Cliff and graded

In a defined contribution plan, the correct answer identifies the two types of permitted vesting schedules as cliff and graded. A cliff vesting schedule means that employees become fully vested in their accrued benefits after a specified period of service. For example, if a plan has a three-year cliff vesting schedule, participants will gain 100% ownership of their contributions and any employer contributions after three years of service; if they leave before that period, they will forfeit the employer contributions. On the other hand, graded vesting allows employees to gradually earn ownership of employer contributions over time. For instance, a graded schedule might provide that an employee is vested in 20% of their employer contributions after one year, 40% after two years, and so on, until they reach 100% vesting after a certain number of years. Both types of schedules are designed to reward employee loyalty and incentivize ongoing employment while ensuring some level of employer protection against turnover. Understanding these vesting schedules is important for plan sponsors to ensure compliance with regulations and to communicate the specifics of the vesting structure to participants effectively.