The accumulation of benefits an employee has earned that is payable at a future date.
Accrued Benefits Details
Employees can earn accrued benefits due to various reasons, including years of service and loyalty. These benefits can come in many forms, such as cash, vacation time, stock ownership, sick pay, or a pension plan.
One of the reasons accrued benefits exists is to promote good conduct from employees. Usually, the longer an employee works for the company, the better the accumulated benefits will be. This could mean a longer personal time off period, a better pension plan, or a more attractive employee stock ownership plan.
On the other hand, employees who have only worked for a short time in the company won't receive as many benefits as veteran employees. Worse, if an employee is fired or quits the job early, they may get reduced benefits or lose all of them.
Example of Accrued Benefits
Rita is an employee who works for a private company. She has worked for the company for more than five years and is eligible to receive a retirement saving plan known as a 401(k). Using this plan, Rita can set aside some of her monthly salaries to add to the plan's fund. The fund is accumulated and withdrawn when she reaches her retirement age. Moreover, Rita's employer also contributes 1% to the plan every month.
Along with Rita's 401(k) plan, she has earned more vacation time. For every five years that she works, she will receive an additional week of vacation. So as of now, she receives three weeks or 15 days of vacation a year.
Types of Accrued Benefits
There are many types of accrued benefits, including:
- Vacation and Sick Time: These two benefits relate to the fact that employees can choose not to work for a certain period without incurring a penalty. Furthermore, at some point, employees may also take time off while still receiving the regular salary amount.
- Pension Plans: Pension plans are one of the most common types of benefits an employee can get. There are various types of pension plans. What plan an employer offers may vary depending on the type of company or whether the company is private-owned or government-owned. Some pension plans include profit-sharing pension plans, money purchase pension plans, and tax-advantaged retirement plans like 401(k).
- Stock Ownership: To promote a sense of ownership in the company, employers may share benefit plans with eligible employees. The plan exists to align the employees' interests and goals to shareholders, promoting the business's overall growth. In usual cases, the distribution of ownership's amount is based on years of service. After a certain amount of years, the plan is fully vested; the employee is now entitled to the account's full amount. After the employee retires, they will receive the stocks' ownership portion and can sell the shares back to the company.
Accrued Benefits vs. Accrued Income
Accrued benefits and accrued income have similarities in that both of them are accumulated and will only be given to employees at some point later. The key difference between these two is when to use each respective term. Accrued benefits refer to the employee benefits received at a later date. In most cases, an employee can only withdraw these benefits at retirement. The only exceptions are sick and vacation time off, of which employees have a specific allocation per year.
Accrued income is a relatively broader term meaning money that has been earned but not yet received. In terms of employment, accrued income is the accumulated wage employee earns paid on a certain date. A typical example of this is monthly salaries. Employees don't get paid hourly or daily; instead, the employer accrues the worker's earning and gives it only after a month has passed.