Defined Benefit Plan Contribution Limits for 2023: [IRS Age + Solo Maximum]

What is the maximum amount I can contribute to my defined benefit plan? This question gets asked all the time for both solo and group plans. Defined benefit plan contribution limits can be challenging.

These plans are great for small and large business owners who are looking for large, tax-deductible contributions. Let’s jump into the details.

As a general rule, the annual solo retirement benefit for an employee under a defined benefit pension plan cannot exceed the lower of: (1) 100% of the employee’s average compensation or W2 for the highest 3 consecutive years; or (2) $265,000 for tax year 2023 ($245,000 for tax year 2022 and $230,000 for tax year 2021)

The assumed solo benefit payout at retirement is as follows:

Year	Amount
2023	$265,000
2022	$245,000
2021	$230,000
2020	$230,000
2019	$225,000

So what are the contribution limits?

Defined benefit plans have become popular for the self-employed. The plans are set up to provide a predetermined retirement benefit to employees (or their beneficiaries). But what are the defined benefit limits for a solo plan?

At the end of the day, there is no set maximum defined benefit plan contribution. Instead, the final benefit payment at retirement is limited. This is commonly referred to as the 415 limits.

Based on the limits, a participating employee with ten years in a plan may receive a maximum annual benefit amount of $265,000. This would start at age 62.

Maximum contribution to defined benefit plan

The IRS will place a compensation maximum used in the benefit calculation. For the year 2023, the maximum compensation is $330,000. The IRS annually indexes these compensation and benefit limits.

This is either in the form of a certain lump sum dollar amount or a specific percentage of compensation. In contrast, a defined contribution plan is typically employee funded. Think 401k, 403b, and IRA’s.

Employer contributions to a defined benefit plan are very complex to determine and require the work of an actuary. The assets of the plan are held in a pool, rather than individual accounts, and as a result, the employees have no voice in investment decisions.

			Cash Balance Plan Cheat Sheet
		2022					2023
2022 Amounts, NRA = 62+3					2023 Amounts, NRA = 62+3
Comp assumes		245,000			Comp assumes		265,000
Age	Max %	415 Limit	Max Cont		Age	Max %	415 Limit	Max Cont	415 with 10 YOP
22	37%	41,268	91,236		22	29%	47,043	75,660	0
23	39%	43,351	94,325		23	30%	49,417	78,540	0
24	40%	45,540	97,522		24	31%	51,913	81,532	0
25	41%	47,840	100,828		25	32%	54,537	84,642	0
26	43%	50,257	104,247		26	33%	57,293	87,870	0
27	44%	52,797	107,784		27	34%	60,189	91,221	0
28	45%	55,467	111,445		28	36%	63,223	94,702	0
29	47%	58,273	115,232		29	37%	66,433	98,320	0
30	49%	61,220	119,145		30	39%	69,795	102,076	0
31	50%	64,318	123,196		31	40%	73,328	105,976	0
32	52%	67,574	127,386		32	42%	77,041	110,028	770,410
33	54%	70,998	131,725		33	43%	80,944	114,236	809,440
34	56%	74,595	136,210		34	45%	85,046	118,608	850,460
35	57%	78,374	140,848		35	46%	89,358	123,150	893,580
36	59%	82,347	145,649		36	48%	93,889	127,867	938,890
37	61%	86,523	150,615		37	50%	98,652	132,767	986,520
38	64%	90,915	155,759		38	52%	103,659	137,858	1,036,590
39	66%	95,528	161,074		39	54%	108,921	143,145	1,089,210
40	68%	100,379	166,578		40	56%	114,454	148,640	1,144,540
41	70%	105,476	172,270		41	58%	120,270	154,349	1,202,700
42	73%	110,836	178,162		42	60%	126,383	160,279	1,263,830
43	75%	116,471	184,260		43	68%	132,808	179,111	1,328,080
44	78%	122,392	192,245		44	70%	139,565	185,285	1,395,650
45	82%	128,620	200,409		45	72%	146,666	191,670	1,466,660
46	85%	135,164	208,742		46	75%	154,131	198,280	1,541,310
47	89%	142,046	217,259		47	77%	161,982	205,125	1,619,820
48	92%	149,279	225,951		48	80%	170,234	212,208	1,702,340
49	96%	156,885	234,832		49	83%	178,910	219,539	1,789,100
50	100%	164,880	243,897		50	86%	188,030	228,241	1,880,300
51	103%	173,287	253,157		51	90%	197,621	239,114	1,976,210
52	107%	182,126	262,608		52	95%	207,702	250,494	2,077,020
53	111%	191,418	272,256		53	99%	218,303	262,413	2,183,030
54	115%	201,187	282,104		54	104%	229,447	274,894	2,294,470
55	119%	211,458	292,155		55	109%	241,165	287,973	2,411,650
56	123%	222,257	302,408		56	114%	253,484	301,673	2,534,840
57	128%	233,612	312,876		57	119%	266,437	316,026	2,664,370
58	132%	245,551	323,552		58	123%	280,057	325,220	2,800,570
59	137%	258,102	335,976		59	120%	294,375	317,119	2,943,750
60	142%	271,299	348,287		60	124%	309,430	329,448	3,094,300
61	146%	285,175	357,231		61	122%	325,261	323,686	3,252,610
62	142%	299,765	347,954		62	120%	341,904	317,047	3,419,040
63	138%	315,104	338,558		63	117%	335,180	310,234	3,351,800
64	144%	308,856	353,936		64	114%	328,305	303,244	3,283,050
65	151%	302,468	369,976		65	112%	321,250	296,085	3,212,500
66	151%	295,913	370,060		66	109%	314,012	288,729	3,140,120
67	158%	311,069	387,204		67	106%	306,599	281,172	3,065,990
68	165%	327,005	405,105		68	103%	298,982	273,418	2,989,820
69	173%	343,762	423,792		69	100%	291,156	265,467	2,911,560
70	181%	361,381	443,291		70	97%	283,127	257,330	2,831,270
71	189%	379,905	463,630		71	94%	274,894	249,021	2,748,940
72	198%	399,381	484,841		72	91%	266,468	240,555	2,664,680
73	194%	419,857	475,622		73	88%	257,864	231,951	2,578,640
74	186%	441,386	454,608		74	84%	249,097	223,231	2,490,970
75	177%	433,640	433,640		75	81%	240,188	214,416	2,401,880

What is the maximum contribution I can make?

Once established, the employer must continue to fund the plan, even if the company has no profits in a given year. Since the employer makes a specific promise to pay a certain sum in the future, it is the solo employer who assumes the risk of fluctuations in the value of the investment pool.

Before 401k’s became popular in the early 1990s, many companies offered a traditional pension. Typically an employee worked a set amount of years, for a certain amount of income at retirement; there were no bells and whistles and no options other than the life annuity at retirement.

What is the annual benefit limit?

Obviously as these became popular, the IRS imposed solo limits and regulations on defined benefit plans. They typically adjust it each year due to cost of living, much like IRA and 401k contribution limits.

Contributions to a defined benefit plan are based on actuarial assumptions and computations. These calculations will be determined up front.

The contributions are based on the required amount needed to provide benefits under 415. This is why plans must have an actuary review and certify the plans annually. The compensation amount of $265,000 is not entirely accurate. The annual defined benefit limits may not exceed the lesser of:

1. 100% of the employee’s compensation averaged for the highest 3 consecutive years; or
2. $265,000 (as discussed)

DB Plan Advantages ✅	DB Plan Disadvantages ❌
Eligible for QDI deduction under Section 199	Mandatory contributions
Flexible min/max/target range ✅	Higher administrative costs
$100k plus tax deductions	Conservative investments
Tax-deferred growth	Permanent plan structure

How can I maximize my contributions?

There is no maximum dollar amount per se. The solo contribution amount must be enough to satisfy an annual benefit paid out in the future. This will not be able to exceed 100% of the employee’s average compensation over 3 consecutive years.

The employee may have a W2 that is higher than the limitation, but the actuary will only use the maximum contribution.

Annual contributions under a defined benefit plan can be upwards of $400,000. This is especially true for employees getting close to retirement age. The maximum contribution to a defined benefit plan is substantially higher than a 401(k) plan.

But to truly maximize contributions, the plans can be combined with a 401k plan. With a “combo” plan, the actuary will still perform cross-testing on both plans to make sure they are in compliance.

The company has the ultimate responsibility to invest the plan assets for the benefit of the employees. If the investment does not generate the required return, the business owner may be forced to make additional contributions to essentially “catch-up” the account balance. That is why it is critical that the company makes two important investment decisions:

• Proper asset allocation – this has a significant impact on investment returns. If the assumed interest rate is high there could be large shortfalls if anticipated returns are not met.
• Addressing plan shortfalls – if the plan assets do not result in the expected returns, elective 401(k) contributions may be paused to free up funds to finance the required defined benefit plan contributions. Certain shortfalls can also be amortized based on established IRS criteria.

Prior service adjustments

There are several ways you can get higher contribution levels. One such way is to include a prior service or previous service opening credit in year one.

This essentially allows the company to bake a contribution for employees who worked in prior years. as a general rule. You can get an additional 50% of the normal contribution limit based on a current pay credit. This allows a business owner with substantial net income in a current year to make a significant contribution.

But remember that a substantial contribution or frontloading a plan with prior service will help tremendously in year one, but it will tend to reduce contributions in future years.

Remember that solo plans are looking to target a benefit amount at retirement. So, every dollar contributed today is one less dollar that can be contributed in the future.

Defined benefit plan contribution limits

In addition to adding prior service, there are other options if you want to make more significant contributions. For example, the IRS typically allows a plan to accrue up to 150% of the accrued benefit. This allows the plan or company to make larger contributions above the individual employee benefits. This essentially allows the company to pre-fund or target a larger contribution in a year in which income was higher.

But funding adds up to 150% of the accrued benefit and will reduce contributions in the future. So make sure you consider it in a year with substantial net income.

These plans are age, waited in compensation based. So the older you are, and the more money you make, the higher your contributions will be.

Defined benefit plans, though, do not have a contribution limit per se. They are driven by the 415 limits, which are the same limits that define contribution plan funding. That’s why the maximum contribution to a defined benefit plan is so high.

But defined benefit plans provide funding ranges. This includes a minimum, maximum, and target funding level. The target funding level is essentially a straight-line contribution That will directly lead to the accrued benefit at retirement.

Take a look at defined benefit plan contributions by age in the table below:

Contribution Averages by Age	Solo contribution Limits by Age
Age 30 = $80,000	Age 30 = $120,000
Age 40 = $120,000	Age 40 = $165,000
Age 50 = $185,000	Age 50 = $240,000
Age 60 = $240,000	Age 60 = $345,000

Consistently Profitable

But clients have questions. What professions or industries make the most sense for defined benefit plans? Does a plan make sense for my business?

The truth is that many companies and professionals are ideal candidates. The following are great candidates for defined benefit plans:

1. Businesses with consistent high profits (historically and forward-looking)
2. Professional service companies like attorneys, physicians, engineers, CPAs, etc.)
3. Companies who desire to improve morale and employee retention
4. Owners trying to “catch up” on retirement savings
5. Owners looking to maximize tax deductions

A defined benefit plan doesn’t require high profits to be effective. But it certainly helps. It can be more challenging if your business is cyclical in nature and subject to boom and bust cycles. A business with inconsistent profits or cash flows can do very well with defined benefit plans, but it becomes more difficult in a down cycle.

Ideally, persistent and high cash flows and the expectation of decent cash flows over the foreseeable future make the most sense. We’ve seen companies in manufacturing, technology, distribution, real estate, and various services. It might make sense if a business owner earns more than $300,000 a year and is motivated by saving taxes.

Owners looking to maximize tax savings

Retirement savings are excellent. But lowering income tax is one of the best benefits and what drives the majority of business owners to solo defined benefit plans. Combining marginal state and federal tax rates can make these plans a no-brainer for business people searching for tax deferrals. Any defined benefit plan funding will come off at the owner’s marginal tax rate.

Many clients save over 40% in taxes when considering their marginal rates. But a cash balance plan can be especially appealing in states like California, where the top marginal income tax rate is 13.3%. With the maximum federal rate at 37%, employers who reside in states with no (or negligible) state tax can make a big difference.

How much can I contribute?

The defined benefit limits will be significantly higher than those of a 401(k) plan. That is unless a business owner is young (under 30 years old). The contribution difference grows higher as age increases.

This enables solo business owners to put away large amounts into retirement and build tax-deferred accounts. That is why defined benefit plans are great for business owners who have higher-than-average compensations. It may be the best financial decision you can make for your future.

It is important to understand all your options when determining which type of retirement plans you will offer in your company or practice. We can help you put together a solid IRS approved plan to your advantage.