Employee Stock Ownership Plans (ESOPs) in the United States are regulated by a variety of rules and guidelines, particularly concerning their vesting schedules. Here’s a general overview of the rules for vesting schedules in American ESOPs:

Vesting Schedule Types

    Cliff Vesting: Employees must work for the company for a certain period before they acquire any ownership. For example, with a three-year cliff vesting schedule, an employee would be 0% vested for the first two years and then 100% vested after three years of service.

    Graded Vesting: Employees gradually become vested over time. Under a six-year graded schedule, an employee might vest 20% after two years, with an additional 20% vesting each year until reaching 100% at the end of the sixth year.

Minimum Standards

    The Employee Retirement Income Security Act (ERISA) sets minimum vesting standards for ESOPs, which employers can exceed but not fall below. ERISA allows for either a three-year cliff vesting plan or a six-year graded vesting plan.

Years of Service

    For vesting purposes, a “year of service” is typically defined as a year in which an employee works at least 1,000 hours. Employers can use different definitions but must be consistent with ERISA regulations.

Leaving Before Vesting

    If an employee leaves before they are fully vested, they forfeit the nonvested portion of their ESOP benefits. This is known as a “forfeiture.” Forfeited shares are typically reallocated among the remaining plan participants or used by the plan to repay a loan the plan took out to buy company shares.

Change of Control

    In the event of a company buyout or other change in control, an ESOP plan may have provisions that accelerate vesting schedules, allowing employees to become fully vested immediately.

Retirement, Death, and Disability

    ESOP participants generally become fully vested immediately upon reaching normal retirement age, or in the case of death or disability while employed by the company.