I am linking 2 SB nation blogs with front page stories on this. Both explain it well. Since we have had a lot of confusion I will quote some of the highlights then let you go read more if you wish. The top story is brief, and bottom is longer and is the title link.
" Players are eligible for the practise squad if they:
Do not have an accrued season in the NFL
On An Active list (53-man roster) for fewer than nine games during their only accrued season.
Players who have served two seasons on a practise squad are eligible for a third season, only if the team has at least 53 players on the active/inactive list for the duration of the players employment.
A player will have served a season on the practice squad if he were a member of that squad for at least three regular season or postseason games during his first two practise squad seasons.
However the player can not sign a contract with his current teams next opponent after 4:00pm EST, 6 days before the game.
"Every player that was cut on Friday that is not a "vested veteran" is subject to the waiver process. A "vested veteran" is a player that has accumulated four or more seasons worth of experience in the National Football League. "