IRC 415(b) Pension Benefit Limits: Dollar Cap and Excess Plans

The IRC 415(b) pension benefit limits cap the annual payout from a tax-qualified defined benefit plan at the lesser of a dollar amount, which is $290,000 for 2026, or 100% of the participant’s highest three-year average compensation.¹² Both ceilings apply to every benefit; whichever is lower controls. The dollar limit is measured as a straight life annuity beginning at the participant’s Social Security Retirement Age, and it gets adjusted actuarially if the benefit starts earlier, starts later, or is paid in another form.

The 2026 Dollar Limit

For plan years beginning in 2026, the maximum annual benefit under the dollar test is $290,000, up from $280,000 in 2025.¹ The statutory base is $160,000, and the IRS applies cost-of-living adjustments each year. Because the limit moves with inflation, benefits close to the ceiling need to be retested every plan year.

The Compensation Limit

The second cap is 100% of average compensation during the participant’s three highest-paid consecutive calendar years with the employer.² Those three years don’t have to be the final years of employment. If an earlier three-year stretch produced higher pay, that period controls.

Two details often surprise people. First, the annual compensation figure that enters the average is itself capped by IRC 401(a)(17), which sets a $360,000 limit for 2026.¹ Each year in the three-year window is capped separately at the 401(a)(17) figure in effect for that year, and the capped amounts are then averaged.³ Someone earning $500,000 each year still averages against $360,000 for 2026. Second, for self-employed participants, compensation means earned income rather than W-2 wages.²

The practical effect: a participant whose high-3 average was $180,000 cannot draw a $290,000 pension, even though the dollar ceiling would allow it. The plan pays $180,000, no more.

The Age the Full Limit Assumes

The $290,000 figure applies without adjustment only to a straight life annuity that begins at the participant’s Social Security Retirement Age. For 415(b), SSRA is:⁴

Age 65 if born before January 1, 1938
Age 66 if born after December 31, 1937 and before January 1, 1955
Age 67 if born after December 31, 1954

For most people retiring today, SSRA is 67.

Starting Early or Late

A benefit that starts before SSRA gets an actuarial reduction so the earlier, longer stream has the same present value as the full limit paid at age 62 or SSRA, whichever is later.² A benefit that starts after SSRA can be actuarially increased. The statute floors the interest rates plans may use for these conversions, keeping sponsors from stretching the limit with aggressive assumptions.

Non-Annuity Payment Forms

If the participant elects a lump sum, a joint and survivor annuity, or another form, the actuary converts that form back into a straight life annuity to test it against the dollar limit. Mortality assumptions and interest rates drive the conversion, and mistakes here are a common source of 415(b) failures. If the converted annuity exceeds the limit, the payout has to come down.

Reductions for Short Participation or Service

Two separate prorations apply to participants who haven’t been around long enough:²

The dollar limit is multiplied by (years of participation in the plan ÷ 10) when participation is under 10 years. Six years of participation gets 60% of the dollar limit.
The 100%-of-compensation limit is multiplied by (years of service with the employer ÷ 10) when service is under 10 years.

Neither reduction can push the applicable ceiling below one-tenth of the full amount. For 2026, that floor is $29,000 for the dollar limit.

Aggregation Across Plans

Employers cannot split a benefit across two plans to double the ceiling. All defined benefit plans of a single employer, and of employers in the same controlled group, are treated as one plan for 415 testing; total benefits from the group can’t exceed the applicable limit.² Multiemployer plans are the exception: a multiemployer plan is not aggregated with other multiemployer plans for this purpose.⁵

The $10,000 Floor

A benefit of $10,000 or less per year is treated as satisfying 415(b) even if it exceeds 100% of the participant’s compensation.² The exception is only available if the employer has never maintained a defined contribution plan in which the same participant took part. This $10,000 figure is not indexed for inflation.

Special Rules for Government and Public Safety Plans

Governmental plans (federal, state, and local government employers) are not subject to the 100%-of-compensation limit at all. The dollar limit still applies. Disability pensions and survivor benefits from a governmental plan are also exempt from both the early-commencement reduction and the short-service proration.²

Police, firefighters, and certain other public safety employees with at least 15 years of service get an additional carve-out: the dollar limit is not reduced for benefits that start before SSRA.² The full amount applies even for retirements in the 50s.

When a Plan Pays Too Much

Paying benefits above 415(b) puts the plan’s tax-qualified status at risk. If the IRS disqualifies the plan, the trust loses its tax exemption, participants are taxed on vested employer contributions for the disqualification years, and the harm spreads to every participant, not just the one whose benefit was too high.⁶

The IRS Employee Plans Compliance Resolution System gives sponsors a way to fix 415(b) failures without disqualification.⁷ Options for recovering an overpayment include:

Reducing future payments to the correct amount and applying an added reduction to recoup the past excess over the remaining payment period. If the participant dies before recoupment is complete, the sponsor is not required to make it up.
Asking the participant to return the overpayment. If the participant returns less than the full amount, the sponsor must contribute the difference to the plan.
A funding exception method, available to well-funded plans, that reduces future payments to the correct level without further recoupment.

When a joint and survivor annuity is being recouped, the reduction applies only to the employee’s own payments; the spouse’s survivor benefit is calculated on the correct maximum, not on the reduced recovery figure.

Options When Benefits Would Exceed the Limit

For high earners whose projected benefit runs up against 415(b), employers use plans outside the qualified system to make up the gap.

Excess Benefit Plans

ERISA defines an excess benefit plan as one maintained solely to provide benefits above the IRC 415 limits.⁸ These plans are exempt from most ERISA rules on funding, vesting, and fiduciary duty. They are typically unfunded promises, which means the participant is a general creditor of the employer and can lose the benefit in a bankruptcy.

Nonqualified Deferred Compensation

Private-sector employers often use a supplemental executive retirement plan to restore benefits lost to both 415(b) and the 401(a)(17) compensation cap. These plans operate under IRC 409A, which regulates the timing of elections and distributions. They are also generally unfunded and carry the same credit risk as excess benefit plans.

Qualified Governmental Excess Benefit Arrangements

Government employers have a dedicated tool under IRC 415(m). A separate arrangement can be established to pay only the portion of a benefit that exceeds the 415(b) limit; those payments are excluded when the main plan is tested against the dollar cap.² Participants cannot elect to defer compensation into it, and distributions are taxed as nonqualified deferred compensation rather than as qualified plan distributions.

1
Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs, as Adjusted for Changes in Cost-of-Living
2
Office of the Law Revision Counsel. 26 USC 415 Limitations on Benefits and Contribution Under Qualified Plans
3
eCFR. 26 CFR 1.401(a)(17)-1 Limitation on Annual Compensation
4
Internal Revenue Service. Chapter 9 Section 415(b) Adjustments
5
eCFR. 26 CFR 1.415(f)-1 Aggregating Plans
6
Internal Revenue Service. Tax Consequences of Plan Disqualification
7
Internal Revenue Service. Employee Plans Compliance Resolution System (EPCRS)
8
Office of the Law Revision Counsel. 29 USC 1002 Definitions