DEFINITION of '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.

BREAKING DOWN 'Benefit Allocation Method'

The specifics for each company's benefit allocation method would be included in the company's employee benefits plan. 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.

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