2016 Defined Benefit Plan Limit
For 2016, the Defined Benefit Plan Limit figures are $210,000 (Annual benefit under a defined benefit plan) and $53,000 (Defined contribution plan limit).
Effective 2016-01-01Source: Notice 2015-75 (IRS)Verified 2026-09-02
Who it applies to
Participants in qualified defined benefit and defined contribution retirement plans subject to IRS Section 415 limitations.
What changed this year, and why
For 2016, the IRS adjusted retirement plan limitations under Section 415 of the Internal Revenue Code for cost-of-living increases, as required by Section 415(d). Effective January 1, 2016, the limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) remained unchanged at $210,000. The limitation for defined contribution plans under Section 415(c)(1)(A) also remained unchanged at $53,000.
Common questions
- What is the maximum annual benefit a defined benefit plan can pay in 2016?
- For 2016, the maximum annual benefit payable under a defined benefit plan is $210,000, as set by IRS under Section 415(b)(1)(A). This amount remained unchanged from 2015.
- What is the defined contribution plan limit for 2016?
- For 2016, the total contributions to a defined contribution plan for any participant cannot exceed $53,000, as set by IRS under Section 415(c)(1)(A). This amount remained unchanged from 2015.
The benefit limit is the lesser of a dollar cap and your average pay
The annual benefit limit applies to every participant in a defined benefit plan. The rule sets a ceiling: the benefit cannot be more than the lesser of two amounts. The first is 100% of the participant's average compensation measured over the three consecutive calendar years in which the participant earned the most. The second is a flat dollar cap of $210,000 for 2016. In practice, this means that even if a participant's average pay over the best three years is very high, the benefit is still held to $210,000. Conversely, if the three-year average pay is below $210,000, the lower pay figure controls and the benefit cannot exceed that average. The dollar cap is adjusted in later years (for example, $215,000 for 2017), but the structure of the test, a lesser-of comparison between average pay and a stated maximum, remains the same from year to year.
For 2016, the annual benefit for a participant under a defined benefit plan can't exceed the lesser of the following amounts. 1. 100% of the participant's average com pensation for his or her highest 3 consecu tive calendar years. 2. $210,000 ($215,000 for 2017).
Publication 560 (2016), Retirement Plans for Small Business (IRS)
What makes a plan a defined benefit plan
The source document defines a defined benefit plan by exclusion: it is any plan that is not a defined contribution plan. Rather than specifying fixed contribution amounts, a defined benefit plan focuses on the benefits to be paid at retirement. Contributions to the plan are calculated based on what is necessary to fund those definitely determinable benefits for participants. Because the funding depends on projections about future benefits, interest rates, mortality, and other factors, the plan requires actuarial assumptions and computations to determine the required contributions. For these reasons, maintaining a defined benefit plan generally demands ongoing professional assistance. The key distinction from a defined contribution plan, which has a stated limit on annual additions to each participant's account, is that the defined benefit plan's structure is built around a promised benefit rather than a fixed contribution amount.
A defined benefit plan is any plan that isn't a de fined contribution plan. Contributions to a de fined benefit plan are based on what is needed to provide definitely determinable benefits to plan participants. Actuarial assumptions and computations are required to figure these con tributions.
Publication 560 (2016), Retirement Plans for Small Business (IRS)
The compensation an employer may take into account
When calculating contributions and deductions for a qualified retirement plan, employers may not use unlimited compensation figures. The IRS caps the amount of an employee's pay that can be taken into account. For 2016, the maximum compensation that can be considered for each employee is $265,000. If an employee earns more than this amount, the excess is simply ignored for plan purposes such as testing contribution limits and computing deductible contributions. This cap is adjusted periodically for inflation; for 2017, it increases to $270,000. Elective deferrals are included in compensation for this purpose. The rule applies uniformly across plan types, whether defined benefit or defined contribution, meaning no participant's compensation can be recognized above the stated ceiling regardless of how much the participant actually earns.
The maximum compensation that can be taken into account for each employee in 2016 is $265,000 ($270,000 in 2017).
Publication 560 (2016), Retirement Plans for Small Business (IRS)
The separate limit on a defined contribution plan
Defined contribution plans are subject to a separate annual additions limit. For 2016, the total annual contributions and other additions, excluding earnings, to a participant's account cannot exceed the lesser of two amounts: 100% of the participant's compensation, or $53,000. This means that even if a participant's compensation is very high, total additions to the account are held to $53,000. If the participant's compensation is less than $53,000, then the additions are limited to that lower compensation figure. The dollar cap is adjusted annually for cost-of-living increases, rising to $54,000 for 2017. Catch-up contributions for participants age 50 or older are not subject to this limit. The rule ensures that tax-favored retirement savings through defined contribution plans remain within prescribed boundaries.
For 2016, a de fined contribution plan's annual contributions and other additions (excluding earnings) to the account of a participant can't exceed the lesser of the following amounts. 1. 100% of the participant's compensation. 2. $53,000 ($54,000 for 2017).
Publication 560 (2016), Retirement Plans for Small Business (IRS)
Why the deduction has to be figured by an actuary
Unlike defined contribution plans, where contributions follow a fixed formula, defined benefit plans require complex calculations to determine how much must be contributed each year to fund the promised retirement benefits. These calculations involve actuarial assumptions about interest rates, mortality, employee turnover, and other factors. Because of this complexity, the IRS requires that the deduction limit for contributions to a defined benefit plan be figured by an actuary. The actuary applies accepted actuarial methods to determine the minimum funding requirement and the maximum deductible contribution. In computing the deduction, contributions or benefits that exceed the limits described elsewhere in the tax rules cannot be taken into account. Plan sponsors should expect to retain actuarial services on an ongoing basis to maintain compliance with deduction and funding requirements.
Defined benefit plans. The deduction for con tributions to a defined benefit plan is based on actuarial assumptions and computations. Con sequently, an actuary must figure your deduc tion limit.
Publication 560 (2016), Retirement Plans for Small Business (IRS)
The plan has to exist before the year it covers ends
For 2016, to take a deduction for contributions made to a qualified plan - including a defined benefit plan - the employer must have adopted the plan by the last day of the tax year. For a calendar-year employer, this means the plan must be set up by December 31 of that year. The employer, not the financial institution, is responsible for setting up and maintaining the plan. There are two basic steps: first, adopt a written plan document; second, invest the plan assets. If the employer is self-employed, employees other than the owner are not required to sponsor or set up a qualified plan, but if the business has employees, the plan's participation rules must be followed. Missing the December 31 deadline means the employer cannot deduct contributions for that tax year, even if the contributions are made before the tax filing deadline.
Set-up deadline. To take a deduction for con tributions for a tax year, your plan must be set up (adopted) by the last day of that year (De cember 31 for calendaryear employers).
Publication 560 (2016), Retirement Plans for Small Business (IRS)
Contributions above the deduction limit are not lost, just delayed
For a defined benefit plan in the United States, if an employer contributes more than the deduction limit for a tax year, the excess contribution is not lost. Instead, the employer can carry over the difference and deduct it in later years, along with any contributions made for those later years. However, the combined deduction in any later year is still subject to the applicable deduction limit for that year. For profit-sharing and similar defined contribution plans (including SEPs treated as such), the combined deduction including carryovers is capped at 25% of participating employees' compensation for the year. The carried-over amount may also be subject to an excise tax on nondeductible contributions.
If you contribute more to a plan than you can deduct for the year, you can carry over and de duct the difference in later years, combined with your contributions for those years. Your com bined deduction in a later year is limited to 25% of the participating employees' compensation for that year.
Publication 560 (2016), Retirement Plans for Small Business (IRS)
Contributing more than the limit can trigger a 10% excise tax, but not for a defined benefit plan's minimum funding
For 2016, an employer that contributes more than the deduction limit to a retirement plan may owe an excise tax on the nondeductible portion. In general, a 10% excise tax applies to nondeductible contributions made to qualified pension plans, profit-sharing plans, and SEPs. However, there is an important exception for defined benefit plans: the 10% excise tax does not apply to any contribution made to meet the minimum funding requirements of a defined benefit plan. Even if that required contribution exceeds the employer's earned income from the trade or business the plan covers, the excess is not subject to this excise tax. The tax, when it does apply, must be reported on Form 5330.
The 10% excise tax doesn't apply to any contri bution made to meet the minimum funding re quirements in a money purchase pension plan or a defined benefit plan. Even if that contribu tion is more than your earned income from the trade or business for which the plan is set up, the difference isn't subject to this excise tax.
Publication 560 (2016), Retirement Plans for Small Business (IRS)
How each figure was verified
Each number below was read from a stored copy of the document named beside it, and checked to occur word for word in the quoted sentence. The digest is of that stored text.
Notice 2015-75 (IRS)
- Annual benefit under a defined benefit plan
Effective January 1, 2016, the limitation on the annual benefit under a defined benefit plan under § 415(b)(1)(A) remains unchanged at $210,000.
- Defined contribution plan limit
The limitation for defined contribution plans under § 415(c)(1)(A) remains unchanged in 2016 at $53,000.