Javier recently graduated and started his career with DNL Inc. DNL provides a de
ID: 2531955 • Letter: J
Question
Javier recently graduated and started his career with DNL Inc. DNL provides a defined benefit plan to all employees. According to the terms of the plan, for each full year of service working for the employer, employees receive a benefit of 1.5 percent of their average salary over their highest three years of compensation from the company. Employees may accrue only 30 years of benefit under the plan (45 percent). Javier works for DNL for six years and three months before he leaves for another job. Javier’s annual salary was $80,000, $85,000, $90,000, and $95,000 for years 4, 5, 6, and 7 respectively. DNL uses a five-year cliff vesting schedule. Determine Javier’s annual benefit on retirement, before taxes.
Explanation / Answer
Javier is eligible to count six full years of service towards his retirement benefit. Because DNL
uses a 5-year cliff schedule and Javier has worked more than five years, he has vested 100% in
his total retirement benefit. He will receive 9% (6 x 1.5%) of $85,000, the average of his three
highest years of salary [(80,000+85,000+90,000)/3]. (He only earned one-fourth of his salary in
year 7). His annual before-tax benefit will be $7,650 (9% x $85,000).
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