In: Accounting
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?
Calculation of average of last three years salary = ($570,000+$600,000+$630,000)/3
= $600,000
Alicia is entitled to receive 64%(i.e., 32 years * 2 % per year) of the average salary of the last 3 years.
Thus, Alicia is entitled to receive $ 384,000 (ie., 64% of $600,000)
But, the maximum benefit that can be paid to an employee under the tax law as the amount lower of
(1) The employee’s average salary of the three highest years of salary ($600,000) or
(2) $225,000
Therefore, the maximum benefit Alicia can receive in 2019 is $225,000.