Accrued Monthly Benefit
Accrued Monthly Benefit: a certain amount of money an employee will receive as a retirement pension benefit based on the employee’s time of service and salary.
Accrued Monthly Benefit Details
To “accrue” means to “accumulate” or “amass.” When you see an account with the word “accrued” in it—e.g., accrued income or accrued expense—it means that the money associated with these accounts has accumulated, but no one has paid or received it just yet. This is the same for accrued monthly benefit. An accrued monthly benefit is a benefit an employee accumulates over the years that they can only withdraw when they retire.
Accrued monthly benefits are funded either through monetary employer or employee contributions. You can lose these benefits if you quit or your employer fires you from your job.
Accrued Monthly Benefit Example
Before qualifying for a pension benefit, an employee usually needs to put in a set number of years with the company. This period is called the “vesting” period. The purpose of vesting is to encourage loyalty and good performance from employees in return for pension plans for when they retire. The vesting period commonly lasts three to five years.
After the vesting period ends, an employee will start to accrue monthly benefits until they retire. An employer bases the total estimated amount of accrued benefit on the employee’s remaining years of service and expected salary. Normally, employees can review several pension options based on each of their potential retirement dates. Using this information, they can decide when to retire to get a satisfactory pension benefit in the future.
For example, Sarah is a private-company employee and qualifies to receive accrued monthly benefits following her vesting period. She chooses to take all of her pension money in one go (lump-sum) instead of the monthly payment (annuity). After considering her years of service and her salary history, Sarah is eligible to receive a total of $100,000 when she retires. This amount is a combination of her employer’s monthly contribution to the plan as well as her own.
Significance of Accrued Monthly Benefit
Granting accrued monthly benefits not only benefits the employee but also the employer. It incentivizes employees to stay at the company since they may lose their accrued monthly benefits if they quit before the retirement date. Some employers may only provide a fully-vested pension after several years of their service, too. This keeps employees at the job for a certain amount of time if they want to receive their plan. Keep in mind that a fully-vested plan doesn’t mean that the employee can withdraw the benefit before retirement.
Another advantage to the employer is that it gives them tax-advantaged status, either as tax-exempt or tax-deferred. Tax-exempt status frees employers from paying pension tax, while tax-deferred allows them to postpone paying tax until withdrawal at retirement. Since employers contribute to the pension plan out of their gross income, the tax-advantaged status effectively decreases taxable income. Employees can also able defer tax from accrued monthly benefit until withdrawal.