Defined Benefit Pension Plan Contribution Limits: Everything You Need to Know

What is a Defined Benefit Pension Plan?

A defined benefit pension plan is a retirement savings plan in which the employer promises to pay a specified benefit to the employee upon retirement. The benefit is typically based on the employee's years of service and salary history.

Contribution Limits for Defined Benefit Pension Plans

The amount that an employer can contribute to a defined benefit pension plan is limited by law. The limits are set by the Internal Revenue Service (IRS) and are adjusted annually.

For 2023, the contribution limits are as follows:

• Regular annual additions: The maximum amount that an employer can contribute to an employee's defined benefit pension plan is the lesser of:
  • 100% of the employee's compensation, or
  • $660,000 (or $735,000 for participants who are within 5 years of the normal retirement age)
• Catch-up contributions: Employees who are age 50 or older can make additional catch-up contributions of up to $27,500 in 2023.

Employer Considerations

When determining how much to contribute to a defined benefit pension plan, employers should consider the following factors:

• The plan's funding status
• The employee's age and years of service
• The employer's financial condition
• The tax implications of contributions

Employee Considerations

Employees should consider the following factors when evaluating a defined benefit pension plan:

• The amount of the benefit that they are eligible to receive
• The age at which they are eligible to receive benefits
• The vesting requirements
• The investment options available in the plan

Benefits and Drawbacks of Defined Benefit Pension Plans

Benefits:

• Defined benefit pension plans can provide employees with a secure retirement income.
• The benefits are guaranteed by the employer, regardless of investment performance.
• Contributions to defined benefit pension plans are tax-deductible for employers.

Drawbacks:

• Defined benefit pension plans can be expensive for employers to fund.
• The benefits are subject to taxation when they are received.
• Employees may not be able to access their benefits until they reach a certain age.

Alternatives to Defined Benefit Pension Plans

There are a number of alternative retirement savings plans available to employees, including:

• 401(k) plans: 401(k) plans are employer-sponsored retirement savings plans that allow employees to contribute a portion of their salary on a pre-tax basis.
• IRAs: IRAs are individual retirement accounts that allow individuals to save for retirement on a tax-advantaged basis.
• Annuities: Annuities are insurance contracts that provide a guaranteed income stream for a specified period of time.

Which Retirement Savings Plan is Right for You?

The best retirement savings plan for you will depend on your individual circumstances and financial goals. It is important to consider the benefits and drawbacks of each type of plan before making a decision.

Additional Information

• IRS Publication 560: Retirement Plans for Small Business
• Employee Benefits Security Administration (EBSA)
• Pension Benefit Guaranty Corporation (PBGC)

Table 1: Defined Benefit Pension Plan Contribution Limits

Table 2: Benefits of Defined Benefit Pension Plans

Table 3: Drawbacks of Defined Benefit Pension Plans

Table 4: Alternatives to Defined Benefit Pension Plans