Accrued Benefits

What Are Accrued Benefits?

Accrued benefits are benefits that the employee has earned based on their service or other criteria, but that are payable to the employee at some later date. These types of benefits can include sick pay, personal time off, and other related benefits that employees earn or accumulate the longer they work.

Understanding Accrued Benefits

Accrued benefits are a form of income employees receive, but the income is not immediately paid. For example, a worker may collect vacation time based on hours worked. For example, a new employee may only earn two weeks of vacation (accrued over the year), but a veteran of the company may accrue more days or weeks based on their years of service.

If you are fired or quit your job rather than retire, you may lose all of your accrued time off. Whether you are paid for that time or not usually depends on state laws and your employer's rules regarding pay for unused sick or vacation time.

At a future point, the employee may take time off from working and still receive a regular salary. Accrued benefits can also refer to coverage earned by an employee on a pension plan based on years of service with an employer. In the U.S., pension plans are becoming rare in the private sector, as employers have switched over to tax-advantaged retirement accounts.

Types of Accrued Benefits

Accrued benefits refer to an array of benefits that employees receive or build upon during the span of their service with a particular employer. 

Employee Stock Ownership

One example is an employee stock ownership plan (ESOP). In the case of an ESOP, a company sets up a trust fund and directs shares of its stock. Employees may make tax-deductible contributions of company stock to the plan as well.

Distribution of funds to individual employee accounts may be through allocations based on years of service — called vesting — or other calculations.

Shares and other plan assets must vest or reach maturity before employees are entitled to collect them. Employees become entitled to a more substantial proportion of their accounts over time.

For example, after three years of service, an employee may be entitled to 100% of the account. Upon retirement or resignation, an employee receives the fully vested portion of their account. They can then sell the stock back to the company as they would on the open market. A similar accrued benefits plan is a stock-bonus plan.

Pension Plans

Another accrued benefit plan is a money purchase pension plan, which is similar to a profit-sharing plan except contributions are fixed rather than variable. Thus, employers make contributions to each employee's account every year regardless of the company's profits. Employers can also set their vesting schedules as to when employees are entitled to what portion of their accounts.