Benefit Allocation Method

The benefit allocation method is a means of funding a pension plan where a single premium payment is made in order to fund a single unit of benefit for a specified period of time, typically one year (or other specifies unit of time) of recognized service with the employer. A pension plan is a type of retirement plan where an employer makes contributions to a fund that an employee receives upon retirement.

Explained further: With the benefit allocation method, the plan specifies that for each unit of service (each year, for example) an employee will receive a certain amount (either a dollar amount or a specified percentage of salary) towards an employee pension plan. Higher paid employees with longer service typically receive a greater benefit. The employer can then make a payment into a plan such as a deferred annuity on behalf of the employee.

Definition courtesy of Investopedia

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