Certified Plan Sponsor Professional (CPSP) Practice Exam

What type of vesting schedule requires employees to be at a specific service duration before becoming fully vested?

1. Immediate vesting schedule

2. Cliff vesting schedule

3. Graded vesting schedule

4. Equitable vesting schedule

The correct answer is: Cliff vesting schedule

A cliff vesting schedule is characterized by a specific duration of service that employees must complete before they are entitled to any employer contributions in a retirement plan. Under this schedule, employees do not earn any rights to the employer's contributions until they reach a certain milestone, which is commonly set at three years of service. Once employees hit that threshold, they become fully vested immediately, meaning they own 100% of the employer contributions. This type of vesting is often used to encourage employee retention, as workers must stay with the company long enough to gain access to the employer's contributions. This contrasts with other schedules like immediate vesting, where employees are entitled to employer contributions right away, and graded vesting, where vesting occurs incrementally over time. The equitable vesting schedule isn't a standard term in retirement plan language, making it inappropriate in this context. Overall, the cliff vesting schedule effectively ties employer contributions to a specific period of service, ensuring that those who stay longer benefit from the complete employer contribution.