Question

Required information The following information applies to the questions displayed below. 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). Determine Javier's annual benefit on retirement, before taxes, under each of the following scenarios (Use Exhibit 13-1): (Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount. Leave no answer blank. Enter zero if applicable.) a. Javier works for DNL for three years and three months before he leaves for another job. Javier's annual salary was $79,000, $89,000, $98,800, and $105,600 for years 1, 2, 3, and 4, respectively. DNL uses a five-year cliff vesting schedule. Annual before-tax benefit

Answer 1

Requirement a

Only the three full years Javier worked for DNL count toward his retirement benefit. Because DNL uses a five-year cliff vesting schedule and because Javier worked for DNL for less than five full years, Javier does not vest in any of his retirement benefit. So, his before-tax annual benefit from DNL on retirement is $0.

Requirement b

Only the three full years Javier worked for DNL count toward his retirement benefit. Because DNL used a seven-year graded schedule, Javier has vested in 20% of his total benefit. Javier has worked three full years and is eligible to receive 4.5% (3 × 1.5%) of the average of his three highest years of compensation. The average of his three highest years of salary is $88,933 [($79,000 + $89,000 + $98,800)/3]. His annual before-tax benefit is $800 ($88,933 × 4.5% × 20%).

Requirement c

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 × 1.5%) of $132,933, the average of his three highest years of salary [($123,000 + $133,000 + $142,800)/3] (he only earned one-fourth of his salary in year 7). His annual before-tax benefit will be $11,964 (9% × $132,933).

Requirement d

Javier may count six full years of service with DNL towards determining his retirement benefit with DNL. Because DNL uses a seven-year graded vesting schedule, Javier has vested in 80% of his total benefit. His total benefit is 1.5% a year of the average of his three highest years of compensation. Because Javier has worked for six full years, he is eligible for 9% of his average salary for his three highest years of compensation. In this case, his highest salary came in years 4 – 6 (he only earned one-fourth of his salary in year 7). His average salary over this period is $132,933 [($123,000 + $133,000 + $142,800)/3]. So his annual before tax benefit from DNL is $9,571 (i.e., $132,933 × 9% × 80%).

Requirement e

Javier has vested 100% in his total retirement benefit and is eligible for the maximum 45% (1.5% × 30 years) benefit of the average of his three highest years of salary. The average of his three highest years of salary is $244,933 [($235,000 + $245,000 + $254,800)/3]. [in his last year he only worked for three months]. Javier’s before-tax benefit is $110,220 ($244,933 × 45%).