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, 2017. Before retirement, her annual salary was $570,000, $600,000, and $630,000 for 2014, 2015, and 2016. What is the maximum benefit Alicia can receive in 2017?

Answer 1

For employees retiring in 2017, the tax law limits the maximum benefit 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 or (2) $215,000.

Alicia is entitled to receive 64% (32 years*2% per year) of her average salary for her three highest years of compensation. The average compensation is $600,000 (($570000+$600000+$630000)/3), so she is entitled to receive $384000 i.e. $600000*64% from JMM Corporation.

Thus maximum benefit Alicia can receive in Year 2017 is lowest of ( $215000 or $384000).. i.e. $215000