Question

2. Cindy Lou Woo established a qualified defined benefit pension plan for her employees at Christmas Cheer Industries (CCI). The plan contained the following feature:

• It is a unit benefit plan based on the final three years of compensation; units of 1 percent accrue for each year of service.

• In order to participate in the plan, employees must satisfy age and service requirements that are identical to the requirements found in the law.

• Cliff vesting is utilized by the plan and requirement are identical to the requirements in the law. Calculate the pensions the following employees will receive when they retire. Be sure to consider all qualifications for coverage and vesting.

A. Gloria Grinch started working at CCI when she was age 19. She retires at age 65 and her final three years of income are as follows: $98,000, $100,000, and $102,000. Calculate Gloria’s pension at her normal retirement age.

B. Rudolph Schnoz started working at CCI when he was age 21. He leaves the company for a better job when he is aged 30. His final three years of income at RTI are as follows: $69,000, $70,000, and $71,000. Calculate Rudy’s pension at his normal retirement age.

Answer 1

1. Calculation of Gloria's Pension

Benefit Percentage= 1%

Average Salary of Last 3 Year= ($98,000+$100,000+$102,000)/3= $100,000

Years of Service (Plan Membership )= 19 yrs to 65 yrs= 46 Yrs

Annual Pension= 1%x$100,000x46

=$46,000

2. Calculation of Rudolph Schnoz's Pension

Benefit Percentage= 1%

Average Salary of Last 3 Year= ($69,000+$70,000+$71,000)/3= $700,000

Years of Service (Plan Membership)= 21 yrs to 30 yrs= 9 Yrs

Annual Pension= 1%x$70,000x9

=$6,300