2023 Defined Benefit Plan Limit
For 2023, the Defined Benefit Plan Limit figures are $265,000 (Annual benefit under a defined benefit plan) and $66,000 (Defined contribution plan limit).
Effective 2023-01-01Source: Notice 2022-55 (IRS)Verified 2026-09-02
Compared with 2022
| Item | 2022 | 2023 | Change |
|---|---|---|---|
| Annual benefit under a defined benefit plan | $245,000 | $265,000 | +$20,000 (+8.2%) |
| Defined contribution plan limit | $61,000 | $66,000 | +$5,000 (+8.2%) |
Who it applies to
Sponsors and participants of qualified defined benefit and defined contribution retirement plans subject to IRC Section 415.
What changed this year, and why
For 2023, the IRS adjusted the dollar limits on benefits and contributions under qualified retirement plans pursuant to Section 415(d) of the Internal Revenue Code. The limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) increased to $265,000, effective January 1, 2023. The limitation for defined contribution plans under Section 415(c)(1)(A) also increased, to $66,000.
Common questions
- What is the 2023 limit on annual benefits under a defined benefit plan?
- Effective January 1, 2023, the annual benefit under a defined benefit plan is limited to $265,000 under Section 415(b)(1)(A) of the Internal Revenue Code.
- What is the 2023 defined contribution plan limit?
- For 2023, the defined contribution plan limit under Section 415(c)(1)(A) is $66,000.
The benefit limit is the lesser of a dollar cap and your average pay
The benefit limit is the lesser of a dollar cap and your average pay. For 2023, the annual benefit for a participant under a defined benefit plan can't exceed the lesser of the following amounts: 100% of the participant's average compensation for their highest 3 consecutive calendar years, or $265,000 for 2023 ($275,000 for 2024). This means the IRS sets a maximum dollar limit, but also requires that the benefit not exceed 100% of the participant's average compensation over their highest 3 consecutive calendar years. The lesser of these two amounts is the actual limit that applies. For example, if a participant's average compensation over their highest 3 years is less than the dollar cap, their annual benefit limit would be their average compensation amount, not the full dollar cap. The dollar limit is adjusted annually for cost-of-living increases.
efit for a participant under a defined benefit plan can't exceed the lesser of the following amounts. 1. 100% of the participant's average compensation for their highest 3 consecutive calendar years. 2. $265,000 for 2023 ($275,000 for 2024).
Publication 560 (2023), Retirement Plans for Small Business (IRS)
What makes a plan a defined benefit plan
A defined benefit plan is defined by what it is not: any plan that does not meet the definition of a defined contribution plan falls into this category. Rather than specifying how much goes in each year, a defined benefit plan starts with a promised retirement benefit and works backward to figure out what must be contributed. Because the contribution level depends on variables such as the participant's age, the assumed rate of investment return, and mortality expectations, the plan has to use actuarial assumptions and computations to set the annual funding amount. In practice this means the employer typically relies on an actuary on an ongoing basis to keep the plan properly funded and to prepare the annual valuation report.
A defined benefit plan is any plan that isn't a defined con- tribution plan. Contributions to a defined benefit plan are based on what is needed to provide definitely determina- ble benefits to plan participants. Actuarial assumptions and computations are required to figure these contribu- tions.
Publication 560 (2023), Retirement Plans for Small Business (IRS)
The compensation an employer may take into account
The IRS allows employers to take a tax deduction for contributions to qualified retirement plans, but only up to certain limits. When calculating that deduction, the employer cannot consider compensation above a specific cap. For 2023, the maximum compensation that can be taken into account for each employee is $330,000. This means that even if an employee earns more than $330,000, the employer's deductible contribution is based on only the first $330,000 of that employee's pay. The compensation limit is adjusted annually for inflation, so it increases over time. This cap applies separately to each employee in the plan.
The maximum compensation that can be taken into account for each employee in 2023 is $330,000 ($345,000 in 2024).
Publication 560 (2023), Retirement Plans for Small Business (IRS)
The separate limit on a defined contribution plan
For 2023, a defined contribution plan has a separate cap on how much can be allocated to each participant's account each year. This limit covers annual contributions and all other additions to the account, but it excludes investment earnings. The cap is the lesser of 100 percent of the participant's compensation or a fixed dollar amount, which for 2023 is $66,000. The dollar amount is adjusted annually for inflation. Contributions that exceed this limit must be removed or corrected to avoid adverse tax consequences for the plan and the participant.
a defined contri- bution plan's annual contributions and other additions (ex- cluding earnings) to the account of a participant can't ex- ceed the lesser of the following amounts. 1. 100% of the participant's compensation. 2. $66,000 for 2023 ($69,000 for 2024).
Publication 560 (2023), 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 has to be figured by an actuary because the contribution amount depends on actuarial assumptions and computations. Unlike a defined contribution plan where the contribution is a fixed amount or percentage, a defined benefit plan must fund a promised future benefit, and figuring how much needs to be contributed each year requires estimating future investment returns, participant mortality, and other variables. An actuary is the professional qualified to make these calculations and determine the appropriate annual contribution. Consequently, an actuary must figure your deduction limit. This actuarial requirement is a key difference between defined benefit and defined contribution plans, and it's why defined benefit plans typically require ongoing professional administration and annual actuarial valuations to remain properly funded and compliant.
Defined benefit plans. The deduction for contributions to a defined benefit plan is based on actuarial assump- tions and computations. Consequently, an actuary must figure your deduction limit.
Publication 560 (2023), Retirement Plans for Small Business (IRS)
How many employees the plan has to cover
To be a qualified defined benefit plan under IRS rules, the plan must meet minimum coverage requirements by benefiting at least the lesser of: (1) 50 employees, or (2) the greater of 40% of all employees or 2 employees. If the employer has only one employee, the plan must benefit that employee. This requirement ensures that the plan covers a sufficient number of employees rather than being limited to highly compensated individuals. Meeting this minimum coverage requirement is one of several qualification rules that defined benefit plans must satisfy to maintain their tax-favored status, along with rules against asset diversion and nondiscrimination requirements.
Minimum coverage requirement must be met. To be a qualified plan, a defined benefit plan must benefit at least the lesser of the following. 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 (2023), Retirement Plans for Small Business (IRS)
The plan has to exist before the year it covers ends
To claim a tax deduction for contributions to a defined benefit plan, the plan must be established (adopted) by the last day of the tax year for which the deduction is claimed. This means if you want to deduct contributions for 2023, your plan must be formally set up by December 31, 2023. While contributions themselves may have additional deadlines for payment, the plan document itself must exist before the year ends. This deadline applies to employers seeking to deduct their plan contributions on their tax return for that year. Failure to meet this set-up deadline means contributions cannot be deducted for that tax year, even if the money is available and could otherwise be contributed.
Set-up deadline. To take a deduction for contributions for a tax year, your plan must be set up (adopted) by the last day of that year.
Publication 560 (2023), Retirement Plans for Small Business (IRS)
Contributions above the deduction limit are not lost, just delayed
When an employer contributes more to a defined benefit plan than the deduction limit allows for the year, the excess is not forfeited. Instead, the employer can carry over the unused portion and deduct it in later years, combined with contributions made for those years. However, the total deduction in any later year is capped at 25% of participating employees' compensation for that year. This carryover mechanism prevents the loss of retirement savings due to contribution limits while still imposing an annual cap on deductible amounts, ensuring that excess contributions are absorbed gradually rather than all at once.
Carryover of Excess Contributions If you contribute more to a plan than you can deduct for the year, you can carry over and deduct the difference in later years, combined with your contributions for those years. Your combined deduction in a later year is limited to 25% of the participating employees' compensation for that year.
Publication 560 (2023), 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
Contributing more than the IRS deduction limit to a qualified retirement plan can trigger a 10% excise tax on the nondeductible portion. This penalty applies to excess contributions made to defined contribution plans and SEPs. However, for defined benefit plans, the excise tax generally does not apply to contributions made to satisfy minimum funding requirements, even if those contributions exceed the normal deduction limit. This exception recognizes that defined benefit plans must maintain adequate funding to meet future benefit obligations, and penalizing minimum funding contributions could undermine plan solvency. Employers should still monitor contribution levels to avoid unnecessary penalties on discretionary excess amounts.
Excise Tax for Nondeductible (Excess) Contributions If you contribute more than your deduction limit to a retire- ment plan, you have made nondeductible contributions and you may be liable for an excise tax. In general, a 10% excise tax applies to nondeductible contributions made to qualified pension and profit-sharing plans and to SEPs.
Publication 560 (2023), 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 2022-55 (IRS)
- Annual benefit under a defined benefit plan
Effective January 1, 2023, the limitation on the annual benefit under a defined benefit plan under section 415(b)(1)(A) of the Code is increased from $245,000 to $265,000.
- Defined contribution plan limit
The limitation for defined contribution plans under section 415(c)(1)(A) is increased in 2023 from $61,000 to $66,000.