Question

Javier recently graduated and started his career with DNL Inc. DNL provides a defined benefit plan to all employees. According to the terms of the plan, for each full year of service working for the employer, employees receive a benefit of 1.5 percent of their average salary over their highest three years of compensation from the company. Employees may accrue only 30 years of benefit under the plan (45 percent).

Determine Javier’s annual benefit on retirement, before taxes, under each of the following scenarios

EXHIBIT 13-1 Defined Benefit Plans Minimum Vesting Schedules*

Full Years of Service	5-Year Cliff	7-Year Graded
1	0%	0%
2	0	0
3	0	20
4	0	40
5	100	60
6	N/A	80
7	N/A	100

*Percent of employee benefit no longer subject to forfeiture.
Source: §411(a).

Question: Javier works for DNL for 32 years and three months before retiring. Javier’s annual salary was $217,500, $227,500, $235,900, and $246,000 for his final four years of employment. Note that in the year he retired he didn’t work for the entire year, so he received only a portion of the annual salary. What is the annual before-tax benefit?

Answer 1

Javier worked for 32 years but only 30 years to be considered for retirement plans

Javier has vested 100% in his total retirement benefit and is eligible for the maximum 45% as specified in terms of plan.

Therefore , calculate retirement benefits for 30 years.

Average of his three highest years of salary =   [ 217,500 +227,500 +235,900 ]/3 = $226,967x [ last year shall not be considered as he worked for 3 months only ] ]

His annual before-tax benefit will be = $102,135 ( $226,967x x 45%)

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