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 $603,000, $633,000, and $663,000 for 2016, 2017, and 2018. What is the maximum benefit Alicia can receive in 2019?

Maximum benefit in 2019

?

Answer 1

Answer:

Calculate average of 3 highest consecutive years salary as follows:

Average of 3 highest consecutive years salary = ($603000+$633000+$663000)/3 = $633000

Therefore average of 3 highest consecutive years salary is $633000

Alicia is entitled to receive 64% (i.e., 32 years x 2% per year) of her average 3 highest consecutive years salary.

Thus Alicia is entitled to receive $405120 (i.e., 64% of 633000).

However, for employees retiring in 2019 the tax law limits the maximum benefit that can be paid to an employee under a defined benefit plan as the amount lesser of (1) the employee's average compensation of their three highest years of salary ($615000 in Alicia's case) or (2) $225000

Therefore the maximum benefit Alicia can receive in 2019 is $225000