Question

Jacob is a participant in JJ's defined benefit plan. Jacob is 37 years old and earns $160,000. He has 4 years of service for purposes of the plan and has worked at the firm for 5 years. The plan provides a benefit of 1.5% for each year of participation. The plan has the least generous vesting schedule possible. Almost 70 percent of the accrued benefits are attributable to the fifteen equal owners, who have all been working at the company for decades. If Jacob were to leave today, what percent of his salary (as defined by the plan) could he expect to receive at normal retirement? a. 3.6%. b. 4.8%. c. 6.0%. d. 6.4%.

Answer 1

d. 6.4%.

Step-by-step explanation:

Even though 70% of the benefits are allocated to 15 key employees (and also co-owners), non-key employees must receive a minimum benefit.

This minimum benefit = 2% x the number of years in service (for the purpose of the plan) = 2% x 4 = 8%. But this minimum benefit is reduced depending on the % of vesting which in this case = 4 years /5 years = 0.8.

total benefit = 8% x 0.8 = 6.4%