2018 Defined Benefit Plan Limit
For 2018, the Defined Benefit Plan Limit figures are $220,000 (Annual benefit under a defined benefit plan) and $55,000 (Defined contribution plan limit).
Effective 2018-01-01Source: Notice 2017-64 (IRS)Verified 2026-09-02
Compared with 2017
| Item | 2017 | 2018 | Change |
|---|---|---|---|
| Annual benefit under a defined benefit plan | $215,000 | $220,000 | +$5,000 (+2.3%) |
| Defined contribution plan limit | $54,000 | $55,000 | +$1,000 (+1.9%) |
Who it applies to
Sponsors and participants of qualified defined benefit and defined contribution retirement plans subject to IRC § 415.
What changed this year, and why
The IRS announced cost-of-living adjustments to retirement plan limits for 2018 under Internal Revenue Code Section 415.
Common questions
- What is the maximum annual benefit under a defined benefit plan for 2018?
- For 2018, the limitation on the annual benefit under a defined benefit plan under § 415(b)(1)(A) is $220,000, effective January 1, 2018.
- What is the defined contribution plan limit for 2018?
- For 2018, the limitation on contributions under defined contribution plans under § 415(c)(1)(A) is $55,000.
The benefit limit is the lesser of a dollar cap and your average pay
For 2018, the annual benefit a participant can receive under a defined benefit plan cannot exceed the lesser of two amounts. The first amount is 100% of the participant's average compensation calculated over his or her highest 3 consecutive calendar years. The second amount is $220,000, which was adjusted to $225,000 for 2019. This means that even if a participant's average compensation over the relevant period exceeds $220,000, the annual benefit is still capped at that dollar amount. The plan must apply both tests and use the lower result to determine the maximum permissible benefit. These limits ensure that tax-qualified defined benefit plans do not provide disproportionately large benefits to highly compensated participants.
For 2018, 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. $220,000 ($225,000 for 2019).
Publication 560 (2018), Retirement Plans for Small Business (IRS)
What makes a plan a defined benefit plan
A defined benefit plan is identified by what it is not: any plan that is not a defined contribution plan. Unlike defined contribution plans, where each participant has an individual account and the benefit depends on contributions and investment results, a defined benefit plan promises a specific, definitely determinable benefit to each participant. Because the benefit is predetermined, the employer's required contributions are not simply a fixed percentage of pay. Instead, contributions must be calculated using actuarial assumptions and computations to determine what funding is needed to provide those promised benefits. This actuarial work makes defined benefit plans more complex to administer, and the IRS notes that employers will generally need continuing professional help to maintain one.
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.
Publication 560 (2018), Retirement Plans for Small Business (IRS)
The compensation an employer may take into account
For each employee in 2018, an employer may take into account only up to $275,000 of compensation when calculating plan contributions and benefits. This ceiling was raised to $280,000 for 2019 and is adjusted periodically for inflation. Any compensation above this amount is disregarded for plan purposes, even if the employee actually earned more. When applying this limit, elective deferrals are included in the definition of compensation, and elective deferrals themselves are not subject to the limit. The cap applies separately to each employee, so the employer does not aggregate compensation across participants. For self-employed individuals, a further reduction applies when figuring the deduction for contributions made for their own account.
The maximum compensation that can be taken into account for each employee in 2018 is $275,000 ($280,000 in 2019).
Publication 560 (2018), Retirement Plans for Small Business (IRS)
The separate limit on a defined contribution plan
For 2018, a defined contribution plan's annual contributions and other additions (excluding earnings) to the account of a participant can't exceed the lesser of two amounts: 100% of the participant's compensation, or $55,000 ($56,000 for 2019). This limit applies to the total of all contributions and additions credited to a participant's account during the year, not including investment earnings. The limit ensures that tax-qualified defined contribution plans do not allow excessive tax-deferred accumulation. Catch-up contributions for participants age 50 or older are not subject to this limit and can be made in addition to the amounts described here.
For 2018, 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. $55,000 ($56,000 for 2019).
Publication 560 (2018), Retirement Plans for Small Business (IRS)
Why the deduction has to be figured by an actuary
For defined benefit plans, the employer's tax deduction for contributions is not based on a simple percentage of payroll or a fixed formula. Instead, the deduction depends on actuarial assumptions and computations that project future benefit payments, participant demographics, interest rates, mortality tables, and other variables. Because these calculations require specialized expertise, the IRS requires that an actuary figure the deduction limit. The actuary determines how much the employer may deduct for the year based on the funding needed to support the plan's promised benefits. The employer may not take into account any contributions or benefits that exceed the annual limits, and the actuarial determination ensures the deduction reflects only the amount necessary to fund those permitted benefits.
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 (2018), Retirement Plans for Small Business (IRS)
How many employees the plan has to cover
The Internal Revenue Service requires a defined benefit plan to meet minimum coverage rules before it can be a qualified plan. To satisfy the requirement, the plan must benefit at least the lesser of 50 employees, or the greater of 40% of all employees or two employees. If there is only one employee, the plan must benefit that employee. These thresholds set a floor for who must be included; a plan that covers fewer people than the formula allows is not a qualified plan and loses the tax treatment that goes with qualification. The rule applies specifically to defined benefit plans and is separate from the nondiscrimination rules that also apply to qualified plans.
Minimum coverage requirement must be met. To be a qualified plan, a defined benefit plan must benefit at least the lesser of the fol- lowing. 1. 50 employees; or 2. The greater of: a. 40% of all employees, or b. Two employees. If there is only one employee, the plan must benefit that employee.
Publication 560 (2018), Retirement Plans for Small Business (IRS)
The plan has to exist before the year it covers ends
To take a deduction for contributions made for a tax year, the plan must be formally adopted by the last day of that year, which is December 31 for employers on a calendar year. The adoption means the written plan document has been executed and the plan exists; simply setting aside money after the year ends does not count unless the plan was already in place. The rule applies to any qualified retirement plan, including a defined benefit plan. Once the plan is adopted by the deadline, the employer has until the due date of its tax return (including extensions) to actually make the contribution for the year and still treat it as deductible for that year, but the plan itself must be established before the year closes.
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 calendar-year employers).
Publication 560 (2018), 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
The Internal Revenue Service imposes an excise tax when an employer contributes more to a retirement plan than it can deduct for the year. In general, a 10% excise tax applies to these nondeductible contributions made to qualified pension and profit-sharing plans and to SEPs. However, a special rule for self-employed individuals provides that the 10% excise tax does not apply to any contribution made to meet the minimum funding requirements in a money purchase pension plan or a defined benefit plan. Even if that contribution exceeds the employer's earned income from the trade or business for which the plan is set up, the difference is not subject to this excise tax. The tax is reported on Form 5330, which includes a computation of the amount owed. For 2018, the annual benefit under a defined benefit plan is capped at $220,000 and the defined contribution plan limit is $55,000; contributions exceeding these figures and the deduction limit may be nondeductible but, for defined benefit plans meeting minimum funding, the excise tax does not apply.
If you contribute more than your deduction limit to a retirement plan, you have made nondeduc- tible contributions and you may be liable for an excise tax. In general, a 10% excise tax applies to nondeductible contributions made to quali- fied pension and profit-sharing plans and to SEPs. Special rule for self-employed individuals. 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.
Publication 560 (2018), 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 2017-64 (IRS)
- Annual benefit under a defined benefit plan
Effective January 1, 2018, the limitation on the annual benefit under a defined benefit plan under § 415(b)(1)(A) is increased from $215,000 to $220,000.
- Defined contribution plan limit
The limitation for defined contribution plans under § 415(c)(1)(A) is increased in 2018 from $54,000 to $55,000.