2020 Defined Benefit Plan Limit
For 2020, the Defined Benefit Plan Limit figures are $230,000 (Annual benefit under a defined benefit plan) and $57,000 (Defined contribution plan limit).
Effective 2020-01-01Source: Notice 2019-59 (IRS)Verified 2026-09-02
Compared with 2019
| Item | 2019 | 2020 | Change |
|---|---|---|---|
| Annual benefit under a defined benefit plan | $225,000 | $230,000 | +$5,000 (+2.2%) |
| Defined contribution plan limit | $56,000 | $57,000 | +$1,000 (+1.8%) |
Who it applies to
Participants in qualified defined benefit and defined contribution retirement plans subject to IRC Section 415 limitations.
What changed this year, and why
For 2020, the IRS adjusted retirement plan dollar limits for cost-of-living increases under Section 415 of the Internal Revenue Code. The limitation on the annual benefit under a defined benefit plan under § 415(b)(1)(A) increased to $230,000, effective January 1, 2020, from $225,000 in 2019. The limitation for defined contribution plans under § 415(c)(1)(A) also increased, to $57,000 in 2020 from $56,000 in 2019.
Common questions
- What is the maximum annual benefit under a defined benefit plan for 2020?
- Effective January 1, 2020, the limitation on the annual benefit under a defined benefit plan under § 415(b)(1)(A) is $230,000.
- What is the defined contribution plan limit for 2020?
- The limitation for defined contribution plans under § 415(c)(1)(A) is $57,000 for 2020.
The benefit limit is the lesser of a dollar cap and your average pay
For 2020, the annual benefit a participant can receive under a defined benefit plan is capped at the lesser of two amounts. The first cap is 100% of the participant's average compensation for his or her highest 3 consecutive calendar years. The second cap is a flat dollar limit of $230,000 for 2020 and 2021. Whichever of these two amounts is smaller becomes the maximum annual benefit the participant may receive from the plan. This rule means that even if the actuarial calculations would otherwise support a larger benefit, the participant cannot be paid more than the dollar cap, and cannot be paid more than what his or her recent average compensation would support.
Defined benefit plan. For 2020, 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. $230,000 for 2020 and 2021.
Publication 560 (2020), 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: it is any plan that isn't a defined contribution plan. Instead of setting a fixed contribution amount each year, a defined benefit plan works backward from a promised benefit. The employer figures out how much money must be contributed so that the plan can pay definitely determinable benefits to participants when they retire. Because these contributions depend on actuarial assumptions and computations, a defined benefit plan generally requires continuing professional help to maintain.
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. Generally, you will need continuing professional help to have a defined benefit plan.
Publication 560 (2020), Retirement Plans for Small Business (IRS)
The compensation an employer may take into account
When an employer calculates how much it can deduct for plan contributions, it cannot use an employee's full pay without restriction. The maximum compensation that can be taken into account for each employee in 2020 is $285,000 ($290,000 in 2021). This means that even if an employee earned more than the cap, only compensation up to that amount counts toward determining the deductible contribution. Two other rules apply at the same time: elective deferrals are not subject to the deduction limit, and compensation for this purpose includes those elective deferrals.
The maximum compensation that can be taken into account for each employee in 2020 is $285,000 ($290,000 in 2021).
Publication 560 (2020), Retirement Plans for Small Business (IRS)
The separate limit on a defined contribution plan
A defined contribution plan is also subject to an annual ceiling on what can go into a participant's account. For 2020, the 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 $57,000 for 2020 ($58,000 for 2021). This limit applies separately from the defined benefit plan limit and ensures that even participants with very high compensation cannot have more than the dollar cap added to their account in a single year. Catch-up contributions, if applicable, are not counted against this limit.
Defined contribution plan. For 2020, 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. $57,000 for 2020 ($58,000 for 2021).
Publication 560 (2020), Retirement Plans for Small Business (IRS)
Why the deduction has to be figured by an actuary
The deduction an employer may take for contributions to a defined benefit plan cannot be figured by simple arithmetic the way it can for a defined contribution plan. The deduction is based on actuarial assumptions and computations, because it depends on projecting future benefits, participant lifetimes, interest rates, and other variables. Consequently, an actuary must figure your deduction limit. In addition, when figuring the deduction, you cannot take into account any contributions or benefits that exceed the limits discussed under the Limits on Contributions and Benefits section of the publication.
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 (2020), Retirement Plans for Small Business (IRS)
How many employees the plan has to cover
To be a qualified plan, a defined benefit plan must benefit at least the lesser of 50 employees or the greater of 40% of all employees or 2 employees. If there is only one employee, the plan must benefit that employee. This minimum coverage requirement ensures that a defined benefit plan is not used solely to benefit a small group of highly compensated employees. The rule applies to defined benefit plans specifically, including those subject to the 2020 IRS annual benefit limit of $230,000. Employers must design their plan to meet these coverage thresholds; otherwise, the plan will not qualify for favorable tax treatment.
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. 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 (2020), Retirement Plans for Small Business (IRS)
The plan has to exist before the year it covers ends
To take a deduction for contributions for a tax year, a plan must be set up (adopted) by the last day of that year. For calendar-year employers, this means December 31. This deadline applies to both defined benefit plans and defined contribution plans. If the plan is not adopted by this date, the employer cannot deduct contributions made for that tax year. The requirement ensures that the plan exists before the year it covers ends, even if contributions are made later (subject to the filing deadline for the tax return).
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 (2020), Retirement Plans for Small Business (IRS)
Contributions above the deduction limit are not lost, just delayed
If contributions to a profit-sharing plan exceed the deduction limit, the excess is not lost. It can be carried over and deducted in later years. However, the carryover amount, when combined with the contribution for the later year, cannot exceed the deduction limit for that year.
Table 4-1. Carryover of Excess Contributions Illustrated—Profit-Sharing Plan (000's omitted)
Publication 560 (2020), 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
If nondeductible (excess) contributions are made to a plan, the employer may be subject to a 10% excise tax. This applies to defined contribution plans but not to the minimum funding requirement for a defined benefit plan.
Excise tax. If you made nondeductible (ex- cess) contributions to a SEP, you may be sub- ject to a 10% excise tax.
Publication 560 (2020), 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 2019-59 (IRS)
- Annual benefit under a defined benefit plan
Effective January 1, 2020, the limitation on the annual benefit under a defined benefit plan under § 415(b)(1)(A) is increased from $225,000 to $230,000.
- Defined contribution plan limit
The limitation for defined contribution plans under § 415(c)(1)(A) is increased in 2020 from $56,000 to $57,000.