Question

Your company offers a defined benefit retirement plan, and stipulates that you must have 20 years of service in order to be fully vested in the plan, but allows for incremental vesting. You have been with the company for 15 years when you decide to leave the company for a job in another state. A) At the appropriate retirement age, are you eligible for any pension pay out? B) What percent of the total accrued benefit would you be eligible for?

Answer 1

Solution: A) Yes, at the appropriate retirement age we will be eligible for pension payout. Since under defined benefit pension plan, employer promises to his employee for payment of pension at the time of his retirement. Such defined benefit pension is calculated on the basis of appropriate formula considering factors such as years of service, annual/average salary, and appropriate percentage of employee's income.

Thus, the formula for defined benefit pension will be :

= no. of years of service * % of earnings * average salary

B) The percentage of total accrued benefit must not exceed 2%.