In a defined benefit plan, the highest annual benefit payable under the plan must not exceed the lesser of (a) 100 percent of the participant’s average compensation in the high three years of service or (b) $280,000 in 2025 ($275,000 in 2024, $265,000 in 2023, $245,000 in 2022, $230,000 in 2020-2021, as indexed).1 Regulations specify that this limit also applies to the annual benefit payable to a participant.2 The regulations referenced throughout this question were issued April 5, 2007, and generally are effective for limitation years beginning after June 30, 2007.3 For general rules affecting the application of the Section 415 limits, see Q 3868; for the defined contribution plan limits, see Q 3728.
In plan years beginning after 2005, a participant’s high three years of service is the period of three consecutive calendar years during which the participant had the greatest aggregate compensation from the employer.4 Regulations state that a plan may not base accruals on compensation in excess of the Section 401(a)(17) limit ($350,000 in 2025, $345,000 in 2024, $330,000 in 2023, $305,000 in 2022, $290,000 in 2021, $285,000 in 2020, as indexed).5 For plan years beginning prior to January 1, 2006, a participant’s high three years of service had to be three consecutive years in which he or she was both an active participant in the plan and had the greatest aggregate compensation from the employer.
For purposes of defined benefit limits, “annual benefit” means a benefit that is payable annually in the form of a straight life annuity. If the benefit is payable in a form other than a straight life annuity, the annual benefit is determined as the straight life annuity that is actuarially equivalent to the form in which the benefit is paid.6 The application of the Section 415(b) limit to a benefit that is not payable in the form of an annual straight life annuity is explained in Treasury Regulation Section 1.415(b)-1(c). Earlier guidance appeared in Revenue Ruling 2001-51.7 The “annual benefit” does not include employee contributions and rollover contributions.8
Planning Point: In Revenue Ruling 2012-4,9 the IRS ruled that a qualified defined benefit plan that accepts a direct rollover of an employee’s or former employee’s benefit from a qualified defined contribution plan maintained by the same employer does not violate Sections 411 or 415 if the defined benefit plan provides an annuity resulting from the direct rollover that is determined by converting the amount directly rolled over into an actuarially equivalent immediate annuity using the applicable interest rate and applicable mortality table under Section 417(e). If the plan were to provide an annuity using a more favorable actuarial basis than required under Section 411(c), the portion of the benefit resulting from this more favorable treatment would be included in the annual benefit. This interpretation applies to rollovers made on or after January 1, 2013.
The annual benefit does not include employer contributions to an individual medical account under IRC Section 401(h) ( Q 3836) of any individual under a defined benefit pension plan. Such amounts are treated as annual additions to a separate defined contribution plan ( Q 3728).10