Graded vesting
With a graded vesting schedule, a certain percentage of the employer contributions to your 401(k) vest each year over a set period until you are fully (100%) vested in your account.
If an employer chooses to use a graded vesting schedule, they must vest at least 20% of employer contributions at the end of two years and another 20% annually in subsequent years. The longest a graded vesting schedule can last is six years, at the end of which employees are 100% vested.
As a simplified example, let's say that your employer uses the standard graded vesting schedule, and at the end of your third year, $10,000 of your 401(k) value can be attributed to employer contributions. Since you'd be 40% vested at this point, you would legally own $4,000 of this amount plus whatever portion of your account came from your own elective contributions.
Cliff vesting
With a cliff vesting schedule, your 401(k) will fully vest at a specific time. Unlike with a graded vesting schedule, it doesn't happen gradually -- you'll be exactly 0% vested one day and 100% the next.
If your employer chooses to use cliff vesting, they can set the vesting time at up to three years. If they do this, you immediately become fully vested in your 401(k) account upon the third anniversary of your employment.
It's important to note that these examples show the longest your employer contributions can take to vest. Your employer is allowed to use a faster vesting schedule than these, but not a slower one. The vesting schedule for your particular plan should be clearly spelled out in the information your employer provides about its 401(k) plan.
It's also worth noting that regardless of which vesting schedule is used, all employees must be 100% vested when they reach normal retirement age or if the retirement plan is terminated.