2021 Defined Benefit Plan Limit
For 2021, the Defined Benefit Plan Limit figures are $230,000 (Annual benefit under a defined benefit plan) and $58,000 (Defined contribution plan limit).
Effective 2021-01-01Source: Notice 2020-79 (IRS)Verified 2026-09-02
Compared with 2020
| Item | 2020 | 2021 | Change |
|---|---|---|---|
| Annual benefit under a defined benefit plan | $230,000 | $230,000 | +$0 (+0.0%) |
| Defined contribution plan limit | $57,000 | $58,000 | +$1,000 (+1.8%) |
Who it applies to
Participants in qualified defined benefit retirement plans and defined contribution plans subject to IRC § 415 limits.
What changed this year, and why
For 2021, the limitation on the annual benefit under a defined benefit plan under IRC § 415(b)(1)(A) remains unchanged at $230,000, the same level as in 2020. The defined contribution plan limit under § 415(c)(1)(A) increased from $57,000 to $58,000 for 2021.
Common questions
- What is the maximum annual benefit under a defined benefit plan for 2021?
- The maximum annual benefit under a defined benefit plan is $230,000 for 2021, effective January 1, 2021. This is unchanged from 2020.
- What is the defined contribution plan limit for 2021?
- The defined contribution plan limit is $58,000 for 2021, up from $57,000 in 2020.
The benefit limit is the lesser of a dollar cap and your average pay
For 2021, the annual benefit payable to a participant in a defined benefit plan is capped at the lesser of two amounts: 100% of the participant's average compensation for his or her highest 3 consecutive calendar years, or $230,000. This means that even if an employee earned very high compensation over their career, the annual retirement benefit paid from the plan cannot exceed $230,000. Conversely, if an employee's average compensation over their best 3 consecutive years was less than $230,000, then the benefit limit is based on that lower average compensation figure rather than the dollar cap. The limit applies on a per-participant basis and is designed to prevent excessive tax-favored benefits from being paid through qualified defined benefit plans. The $230,000 threshold is adjusted annually for inflation, and plan sponsors must ensure their plan documents and benefit calculations comply with this lesser-of requirement.
Defined benefit plan. For 2021, 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 2021 ($245,000 for 2022).
Publication 560 (2021), Retirement Plans for Small Business (IRS)
What makes a plan a defined benefit plan
A defined benefit plan is any plan that isn't a defined contribution plan. This means that if a plan doesn't fit into the defined contribution category - which includes profit-sharing plans and money purchase pension plans - it is classified as a defined benefit plan. The defining characteristic of a defined benefit plan is that it promises to pay participants a specific, determinable benefit at retirement, rather than maintaining individual accounts with defined contribution levels. Because these plans promise specific benefits, the contributions needed to fund those benefits must be calculated using actuarial assumptions about factors like life expectancy, interest rates, and employee turnover. This actuarial complexity means that employers who establish defined benefit plans generally need ongoing professional assistance to maintain the plan and ensure proper funding levels are met each year.
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 (2021), Retirement Plans for Small Business (IRS)
The compensation an employer may take into account
When determining deductible contributions to a qualified retirement plan, employers cannot take into account unlimited compensation for each employee. For 2021, the maximum compensation that can be considered for each employee is $290,000. This means that even if an employee earned more than $290,000 during the year, the employer's deductible contribution calculations are based on only the first $290,000 of that employee's pay. This compensation limit is adjusted annually for inflation and applies to both defined benefit and defined contribution plans. The limit ensures that tax-deductible contributions remain within reasonable bounds relative to actual employee earnings, preventing excessive tax advantages for highly compensated workers.
The maximum compensation that can be taken into account for each employee in 2021 is $290,000 ($305,000 in 2022).
Publication 560 (2021), Retirement Plans for Small Business (IRS)
The separate limit on a defined contribution plan
For 2021, a defined contribution plan's annual contributions and other additions (excluding earnings) to the account of a participant cannot exceed the lesser of two amounts: 100% of the participant's compensation, or $58,000. This limit applies to the total of all contributions and additions made to an employee's account during the year, including employer contributions, employee after-tax contributions, and forfeitures allocated to the account, but excluding investment earnings. The $58,000 cap is adjusted annually for inflation. This separate limit for defined contribution plans ensures that annual additions to individual accounts remain proportional to compensation and do not exceed reasonable thresholds for tax-favored retirement savings.
Defined contribution plan. For 2021, 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. $58,000 for 2021 ($61,000 for 2022).
Publication 560 (2021), Retirement Plans for Small Business (IRS)
Why the deduction has to be figured by an actuary
The deduction for contributions to a defined benefit plan is based on actuarial assumptions and computations. Unlike defined contribution plans where contributions are simply allocated to individual accounts, defined benefit plans promise specific retirement benefits that must be funded over time. To determine how much needs to be contributed each year to meet these future benefit promises, complex calculations are required that account for factors such as employee ages, life expectancies, retirement ages, salary projections, and assumed investment returns. Because these calculations are technically demanding and must meet specific IRS requirements, an actuary must figure your deduction limit. This ensures that employer deductions reflect the actual cost of providing the promised benefits rather than arbitrary contribution amounts.
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 (2021), Retirement Plans for Small Business (IRS)
How many employees the plan has to cover
To qualify as a defined benefit plan under IRS rules, the plan must satisfy a minimum coverage requirement. Specifically, the plan must benefit at least the lesser of 50 employees or the greater of 40% of all employees or two employees. If the employer has only one employee, the plan must benefit that employee. This rule ensures that retirement plans do not disproportionately favor highly compensated employees while excluding the broader workforce. The requirement is one of several qualification rules a defined benefit plan must meet to maintain its tax-advantaged status. Employers should confirm that their plan design covers enough employees to pass this threshold each year.
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 (2021), 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 defined benefit plan must be set up (adopted) by the last day of that year. For calendar-year employers, this means the plan must be adopted by December 31 of the tax year for which the deduction is claimed. This deadline ensures that the plan exists before the end of the year it is intended to cover. If the plan is not established by this date, contributions made for that year cannot be deducted on the employer's tax return for that year. Employers should plan ahead to ensure the written plan document is in place before the year-end 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 calendar-year employers).
Publication 560 (2021), Retirement Plans for Small Business (IRS)
Contributions above the deduction limit are not lost, just delayed
If an employer contributes more than the deduction limit to a defined benefit plan, the excess contributions are not lost. Instead, they can be carried over and deducted in later years, subject to the deduction limit for those years. This carryover mechanism allows employers to recover contributions that exceeded the limit in a prior year, though the total deduction in any given year - including the carryover - cannot exceed the deduction limit for that year. This rule prevents employers from losing the tax benefit of contributions that were made in good faith but exceeded the annual limit, while still ensuring that deductions are taken in a controlled manner over time.
If you made SEP contributions that are more than the deduction limit (nondeductible contri- butions), you can carry over and deduct the dif- ference in later years. However, the carryover, when combined with the contribution for the later year, is subject to the deduction limit for that year. If you also contributed to a defined benefit plan or defined contribution plan, see Carryover of Excess Contributions under Em- ployer Deduction in chapter 4 for the carryover limit.
Publication 560 (2021), 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
In general, a 10% excise tax applies to nondeductible contributions made to qualified pension and profit-sharing plans and to SEPs when an employer contributes more than the deduction limit to a retirement plan. However, there is a special rule for defined benefit plans. The 10% excise tax does not apply to any contribution made to meet the minimum funding requirements in a defined benefit plan. Even if that contribution is more than 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. This exception recognizes that defined benefit plans have mandatory minimum funding requirements that must be met regardless of the employer's current deduction limit. Employers must still report the tax on nondeductible contributions on Form 5330, but contributions required to satisfy minimum funding standards for a defined benefit plan are exempt from the penalty.
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. 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 (2021), 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 2020-79 (IRS)
- Annual benefit under a defined benefit plan
Effective January 1, 2021, the limitation on the annual benefit under a defined benefit plan under § 415(b)(1)(A) remains unchanged at $230,000.
- Defined contribution plan limit
The limitation for defined contribution plans under § 415(c)(1)(A) is increased for 2021 from $57,000 to $58,000.