Question

Alicia has been working for JMM Corp. for 33 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, 2018. Before retirement, her annual salary was $645,000, $675,000, and $705,000 for 2015, 2016, and 2017. What is the maximum benefit Alicia can receive in 2018?

Answer 1

Lesser of 618000 and 220000 is $220,000, hence it is the maximum benefit.

Step-by-step explanation:

Alicia is entitled to receive 66% (33 years × 2% per year) of her average salary for her three highest years of compensation.

The average of Alicia’s three highest years of compensation is:

=(588000+618000+648000)/3

=618000,

so she is entitled to receive =618000*66% =407880 before considering the limitation

But, In general, the annual benefit for a participant under a defined benefit plan cannot exceed the lesser of:

100% of the participant's average compensation for his or her highest 3 consecutive calendar years, or $220,000 for 2018 .

Lesser of 618000 and 220000 is $220,000, hence it is the maximum benefit.