Question

Alicia has been working for JMM Corp. for 32 years. Alicia participates in JMM’s defined benefit plan. Under the plan, for every year of service for JMM she is to receive 2 percent of the average salary of her three highest years of compensation from JMM. She retired on January 1, 2015. Before retirement, her annual salary was $586,000, $607,000, and $664,000 for 2012, 2013, and 2014. What is the maximum benefit Alicia can receive in 2015?

Answer 1

Solution:

Before considering any benefit limitation, Alicia is entitled to receive 32 years x 2% per year = 64% of her average salary for three highest years of compensation. The average of Alicia's three highest years of compensation is [($586,000 + $607,000 + $664,000)/3] = $619,000, so she is entitled to receive $619,000 x 64% = $396,160 from JMM. However, for employees retiring in 2015 the tax law limits the maximum benefits that can be paid to an employee under a defined benefit plan to the lesser of (1) the employee's average compensation of their three highest years of salary $619,000 or (2) $210,000. Hence, the maximum benefit Alicia can receive in 2015 is $210,000.