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


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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:

YearAmount
2023$265,000
2022$245,000
2021$230,000
2020$230,000
2019$225,000
Maximum Contribution
Defined Benefit Plan Contribution Limits by age

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.

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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  
          
AgeMax %415 LimitMax Cont AgeMax %415 LimitMax Cont415 with 10 YOP
2237% 41,268 91,236 2229%47,04375,6600
2339% 43,351 94,325 2330%49,41778,5400
2440% 45,540 97,522 2431%51,91381,5320
2541% 47,840 100,828 2532%54,53784,6420
2643% 50,257 104,247 2633%57,29387,8700
2744% 52,797 107,784 2734%60,18991,2210
2845% 55,467 111,445 2836%63,22394,7020
2947% 58,273 115,232 2937%66,43398,3200
3049% 61,220 119,145 3039%69,795102,0760
3150% 64,318 123,196 3140%73,328105,9760
3252% 67,574 127,386 3242%77,041110,028770,410
3354% 70,998 131,725 3343%80,944114,236809,440
3456% 74,595 136,210 3445%85,046118,608850,460
3557% 78,374 140,848 3546%89,358123,150893,580
3659% 82,347 145,649 3648%93,889127,867938,890
3761% 86,523 150,615 3750%98,652132,767986,520
3864% 90,915 155,759 3852%103,659137,8581,036,590
3966% 95,528 161,074 3954%108,921143,1451,089,210
4068% 100,379 166,578 4056%114,454148,6401,144,540
4170% 105,476 172,270 4158%120,270154,3491,202,700
4273% 110,836 178,162 4260%126,383160,2791,263,830
4375% 116,471 184,260 4368%132,808179,1111,328,080
4478% 122,392 192,245 4470%139,565185,2851,395,650
4582% 128,620 200,409 4572%146,666191,6701,466,660
4685% 135,164 208,742 4675%154,131198,2801,541,310
4789% 142,046 217,259 4777%161,982205,1251,619,820
4892% 149,279 225,951 4880%170,234212,2081,702,340
4996% 156,885 234,832 4983%178,910219,5391,789,100
50100% 164,880 243,897 5086%188,030228,2411,880,300
51103% 173,287 253,157 5190%197,621239,1141,976,210
52107% 182,126 262,608 5295%207,702250,4942,077,020
53111% 191,418 272,256 5399%218,303262,4132,183,030
54115% 201,187 282,104 54104%229,447274,8942,294,470
55119% 211,458 292,155 55109%241,165287,9732,411,650
56123% 222,257 302,408 56114%253,484301,6732,534,840
57128% 233,612 312,876 57119%266,437316,0262,664,370
58132% 245,551 323,552 58123%280,057325,2202,800,570
59137% 258,102 335,976 59120%294,375317,1192,943,750
60142% 271,299 348,287 60124%309,430329,4483,094,300
61146% 285,175 357,231 61122%325,261323,6863,252,610
62142% 299,765 347,954 62120%341,904317,0473,419,040
63138% 315,104 338,558 63117%335,180310,2343,351,800
64144% 308,856 353,936 64114%328,305303,2443,283,050
65151% 302,468 369,976 65112%321,250296,0853,212,500
66151% 295,913 370,060 66109%314,012288,7293,140,120
67158% 311,069 387,204 67106%306,599281,1723,065,990
68165% 327,005 405,105 68103%298,982273,4182,989,820
69173% 343,762 423,792 69100%291,156265,4672,911,560
70181% 361,381 443,291 7097%283,127257,3302,831,270
71189% 379,905 463,630 7194%274,894249,0212,748,940
72198% 399,381 484,841 7291%266,468240,5552,664,680
73194% 419,857 475,622 7388%257,864231,9512,578,640
74186% 441,386 454,608 7484%249,097223,2312,490,970
75177% 433,640 433,640 7581%240,188214,4162,401,880

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.

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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.

defined benefit plan calculator
Maximum Contribution

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 AdvantagesDB Plan Disadvantages
Eligible for QDI deduction under Section 199Mandatory contributions
Flexible min/max/target range ✅Higher administrative costs
$100k plus tax deductionsConservative investments
Tax-deferred growthPermanent 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.

maximum contribution to defined benefit plan

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 AgeSolo contribution Limits by Age
Age 30 = $80,000Age 30 = $120,000
Age 40 = $120,000Age 40 = $165,000
Age 50 = $185,000Age 50 = $240,000
Age 60 = $240,000Age 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.

Paul Sundin

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6 thoughts on “Defined Benefit Plan Contribution Limits for 2023: [IRS Age + Solo Maximum]”

  1. Paul, I appreciate your articles. I have a question. Is it possible to continue to make tax deferred contributions to your s-Corp Defined benefit plan once you stop receiving a w-2 from the s-Corp? Thanks!

    Reply
    • Hi Christina – I am glad you like the articles! To answer your question, as a general rule you cannot make add’l contributions when you don’t have a W2. These are company sponsored plans for qualifying employees, so you need to have a W2. However, the company might have to make a contribution if the accrued benefit under the plan is low but this would usually not be much. My question though is why you would still have a plan open if you have no W2. Is your plan over-funded? Usually it makes more sense to terminate the plan and roll it over into an IRA.

      Reply
  2. Paul,
    I love your articles and distinct answers, no wasting time. Thanks!
    I have a DBP over 7 years in my S-Corp that just breached $2M. I’m the only participant. My TPA just told me I cannot accumulate more than $2.9M.
    I was shocked. I thought the $2.9M was a contribution limit, not a growth limit.
    I’m worried. I expect to work 10-12 more years. Is this correct? I’m actually in a panic.
    What would you do?

    Reply
  3. How much can an employee contribute to a DB plan for a company they work for which can be deduced from taxes? You don’t really mention this aspect.

    Reply
    • Hi George – There are no employee contributions for a DB plan. All contributions are made and deducted by the company.

      Reply

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