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, 2019. Before retirement, her annual salary was $570,000, $600,000, and $630,000 for 2016, 2017, and 2018. What is the maximum benefit Alicia can receive in 2019? Maximum benefit in 2019

Answer 1

Step 1: Calculate average of Alicia's three highest years of compensation as follows: Average = $570,000 + $600,000 +$630,000 = $600,000 Therefore, average of Alicia's three highest years of compensation is $600,000. Step 2: Calculate amount Alicia is entitled to receive as follows: (32 years x 2% per year) x average of three Amount Alicia entitled to receive = highest years of compensation = 64% $600,000 = $384,000 Therefore, Alicia is entitled to receive $384,000 (before any benefit limitation). Step 3: For employees retiring in 2019, the maximum benefit that can be paid to an employee under a defined benefit plan cannot exceeds lesser of: 1. 100% of the employee's average compensation of their three consecutive highest years of salary. ($600,000 in the given case of Alicia) 2. $225,000. Since in the given case lesser is $225,000, the maximum benefit Alicia can receive in 2019 is $225,000. Therefore, the maximum benefit Alicia can receive in 2019 is $225,000. Note: The maximum limit has changed from $225,000 in 2019 to $230,000 in 2020.

Answer 2

Maximum benefit in 2020: $176,000 Explanation: The average of annual compensation limit for each year ($270,00 for 2017+ $275,00 for 2018+ $280,00 for 2019)/3 = $275,00 (average) Alicia is to receive 2% for every year she worked, which is 32 years.... So then, 2% of $275,00 is equal to $5,500 So $5,500× 32 (years worked)= $176,000