26 U.S.C. § 415 — Limitations on benefits and contribution under qualified plans

(a) General rule.

(1) Trusts. A trust that is part of a pension, profit-sharing, or stock^* bonus plan does not count as a "qualified trust" under section 401(a) if: (A) for a defined benefit plan, the plan pays a participant more than the limit in subsection (b) allows, or (B) for a defined contribution plan, the contributions and other amounts added for a participant in a tax year go over the limit in subsection (c).

(2) Section applies to certain annuities and accounts. The same idea applies to (A) section 403(a) employee^* annuity plans, (B) section 403(b) annuity contracts, and (C) section 408(k) simplified employee pensions — none of them count as the kind of plan those sections describe unless they satisfy whichever limit (defined benefit or defined contribution) fits, and unless they have not been disqualified under subsection (g). For a 403(b) annuity contract, this rule only affects the part of the contract that goes over the subsection (b) or (c) limit.

(b) Limitation for defined benefit plans.

(1) In general. A participant's benefits go over this limit if, expressed as an annual benefit (defined in paragraph (2)), that annual amount is more than the smaller of (A) $160,000, or (B) 100% of the participant's average pay over their highest 3 years.

(2) Annual benefit. (A) In general: "annual benefit" means a benefit paid each year as a straight life annuity, with no extra add-ons, from a plan employees don't contribute to and that has no rollover money in it. (B) Adjustment for other forms of benefit: if the benefit is paid a different way, or employees do contribute or roll money into the plan, the IRS must convert the benefit into the equivalent of that straight life annuity to check the limit — ignoring add-on benefits unrelated to retirement income, and ignoring the part of a joint-and-survivor annuity that qualifies as a "qualified joint and survivor annuity" under section 417. (C) Adjustment to the $160,000 limit when benefits start before age 62: the IRS reduces the $160,000 limit, by regulation, so it equals what a $160,000-at-62 benefit would be worth starting at the actual, earlier age. (D) Adjustment when benefits start after age 65: the opposite happens — the limit is increased so it equals what a $160,000-at-62... actually a $160,000-at-65 benefit would be worth starting at the later age. (E) Limits on the assumptions used for these age adjustments: the interest rate assumed cannot be lower than 5% (or the plan's own rate, if higher) for the before-62 adjustment and most benefit-form adjustments; for benefit forms covered by section 417(e)(3), it cannot be lower than the greatest of 5.5%, a rate tied to 105% of the benefit using the applicable interest rate under section 417(e)(3), or the plan's own rate; and for the after-65 adjustment, the assumed rate cannot be higher than 5% (or the plan's own rate, if lower). Cost-of-living increases under subsection (d)(1) are ignored before the year they actually take effect, and the mortality table used must be the official "applicable mortality table" under section 417(e)(3)(B). For plans of certain small eligible employers (defined in section 408(p)(2)(C)(i)), the 105%-of-benefit alternative rate does not apply. (F) [Repealed.] (G)–(H) Special rule for qualified police officers and firefighters: the before-62 reduction in (C) does not apply to a "qualified participant" — someone in a state, tribal, or local government defined benefit plan with at least 15 years of service as a full-time police officer, firefighter, or emergency medical provider for that government, or as a member of the U.S. Armed Forces. (I) Exemption for survivor and disability benefits under governmental plans: the before-62 reduction and the 10-years-of-participation reduction (paragraph (5)) also don't apply to disability income from a governmental plan^*, or to amounts a governmental plan pays to an employee's beneficiaries, survivors, or estate after death.

(3) Average compensation for high 3 years. A participant's "high 3 years" is whichever 3-or-fewer consecutive calendar years gave the participant the highest total pay from the employer. For a self-employed person, "earned income^*" (under section 401(c)(2), without the foreign-income exclusion in section 911) is used instead of "compensation."

(4) Total annual benefits not over $10,000. A participant's defined benefit plan payout is treated as staying under the subsection (b) limit if (A) that plan and every other defined benefit plan the same employer runs never pay the participant more than $10,000 in the current or any earlier plan year, and (B) the employer has never also run a defined contribution plan the participant was in.

(5) Reduction for participation or service under 10 years. (A) If an employee has been in a defined benefit plan less than 10 years, the dollar limit in paragraph (1)(A) is multiplied by a fraction: years (or part-years) of participation in that plan, divided by 10. (B) The same kind of fraction — but based on years of service with the employer, not years of plan participation — applies to the compensation limit in paragraph (1)(B) and to the $10,000 limit in paragraph (4). (C) Either fraction can never shrink a limit below one-tenth of what it would otherwise be. (D) Regulations may apply this fraction separately each time a plan's benefit structure changes.

(6) Computation of benefits and contributions. Calculating defined-contribution benefits, defined-benefit contributions, and benefits or contributions under a section 414(k) plan — all for section 401(a)(4) nondiscrimination purposes and for this section — must follow IRS regulations consistently.

(7) Benefits under certain collectively bargained plans. The compensation-based limit in paragraph (1)(B) does not apply, for a year, to a collectively bargained defined benefit plan (not a multiemployer plan^*) that (A) is maintained that year under a union agreement, (B) has at least 100 participants all year, (C) bases benefits solely on length of service, the years worked, retirement age, and retirement date, (D) fully vests benefits after 4 years of service, and (E) requires no more than 60 straight days of service to join. This break doesn't apply to a participant whose pay, in any 3 years of the last 10 before leaving, beat the average pay of all participants for those years — or to anyone who is also a participant in another plan this section covers, run by the same employer. When this paragraph does apply, the $160,000-type dollar limit for that participant is cut in half.

(8) Social security retirement age defined. This term borrows the Social Security Act's retirement-age definition, but ignores the age-increase factor and treats the early retirement age as 62.

(9) Special rule for commercial airline pilots. If FAA rules force a pilot to retire at some age between 60 and 62, that mandatory age is used instead of 62 for the early-benefit adjustment in paragraph (2)(C) — unless the pilot actually leaves before turning 60, in which case the normal rule applies.

(10) Special rule for State, Indian tribal, and local government plans. (A) For a plan run by a State, local government, or related agency (including certain tribal governmental plans), a "qualified participant's" benefit limit can never be less than the benefit already earned under the plan as of October 14, 1987. (B) A "qualified participant" here means someone who joined the plan before January 1, 1990. (C) This protection only applies if every employer in the plan elected it before the end of the first plan year starting after December 31, 1989; that election can be revoked by the end of the third plan year after this rule was added, with the revocation applying retroactively and going forward, though special income-timing rules apply to money paid after a revocation.

(11) Special limitation rule for governmental and multiemployer plans. The compensation-based limit in paragraph (1)(B) does not apply to governmental plans (section 414(d)) or multiemployer plans (section 414(f)). It also doesn't apply to a plan of certain tax-exempt organizations described in section 3121(w)(3)(A) — except for benefits earned by highly compensated employees (section 414(q)) of that organization once they become highly compensated, all of whose benefits then count toward the limit.

(12) Special rule for certain employees of rural electric cooperatives. The compensation-based limit in paragraph (1)(B) doesn't apply to a participant in an "eligible rural electric cooperative plan" — a multi-employer plan where at least 85% of the employers are rural cooperatives or their national association — except for a highly compensated employee, whose exemption is measured as of termination, the start of distributions, or the preceding 5 plan years. An employer in such a plan may opt out of this break for its employees, and the IRS must write regulations preventing this rule from boosting highly compensated employees' benefits.

(c) Limitation for defined contribution plans.

(1) In general. A participant's contributions and other additions go over this limit if, expressed as an "annual addition" (defined in paragraph (2)), the total is more than the smaller of (A) $40,000, or (B) 100% of the participant's compensation.

(2) Annual addition. This means, for a year, the sum of (A) employer contributions, (B) employee contributions, and (C) forfeited amounts credited to the account — but not counting rollover contributions or simplified-employee-pension contributions excluded from income under section 408(k)(6). Contributions for medical benefits after separation from service (as described in section 419A(f)(2)) do not count against the 100%-of-compensation part of the limit.

(3) Participant's compensation. (A) Normally this means pay from the employer for the year. (B) For a self-employed person, it means earned income under section 401(c)(2), ignoring the foreign-income exclusion in section 911. (C) For a participant who is permanently and totally disabled, is not a highly compensated employee, and whose employer elects this treatment, "compensation" means what the person would have earned at their pre-disability pay rate — but only if contributions based on that amount are fully vested immediately, and this special rule can cover all similarly disabled participants without the highly-compensated-employee condition if the plan continues contributions for a fixed period. (D) "Compensation" also includes elective deferrals under section 402(g)(3), and amounts an employer contributes or defers at an employee's election that are excluded from income under sections 125, 132(f)(4), or 457. (E) For a 403(b) annuity contract, "compensation" means the participant's includible compensation as defined in section 403(b)(3).

(4)–(5) [Repealed.]

(6) Special rule for employee stock ownership plans. If no more than one-third of an employer's deductible contributions to an employee stock ownership plan for a year go to highly compensated employees, then this section's limits do not apply to (A) forfeitures of employer securities bought with a loan under section 404(a)(9)(A), or (B) employer contributions deductible under section 404(a)(9)(B) that are charged to a participant's account. A "qualified gratuitous transfer" under section 664(g)(1) allocated to a participant still can't exceed this section's limits, but doesn't count toward whether some other amount exceeds them.

(7) Special rules relating to church plans. (A) A church employee — including staff of certain church-affiliated organizations — can elect an alternative $10,000 annual-addition limit for a 403(b) contract, capped at $40,000 total across all years. (B) All years working for a church or convention of churches, and everything those churches contributed for a minister or lay employee, are treated as coming from a single employer. (C) A missionary serving outside the U.S. can use a $3,000-per-year limit instead, unless their adjusted gross income for that year tops $17,000. (D)–(E) "Annual addition" and "church"/"convention or association of churches" keep the meanings used elsewhere in this section and in section 414(e).

(8) Special rule for difficulty-of-care payments excluded from gross income. (A) If someone excludes a "difficulty of care" foster-care payment from income under section 131, their compensation or earned income for the 100%-of-compensation limit is increased by that excluded amount. (B) Any extra contribution this allows is treated as after-tax investment in the contract, and does not disqualify the plan.

(d) Cost-of-living adjustments.

(1)–(2) The IRS must adjust the $160,000 defined-benefit limit, the dollar amount used for participants who have separated from service, and the $40,000 defined-contribution limit every year for inflation, using a method similar to how Social Security benefit amounts are adjusted.

(3) The starting point ("base period") for these adjustments is the calendar quarter beginning July 1, 2001 for both the $160,000 and $40,000 amounts; for participants who left service after 1994, it is the quarter beginning the prior July 1; for those who left before 1995, it is the quarter beginning the prior October 1.

(4) Increases to the $160,000 amount are rounded down to the nearest $5,000; increases to the $40,000 amount are rounded down to the nearest $1,000.

(e) [Repealed.]

(f) Combining of plans. (1) For applying the subsection (b) and (c) limits, all of an employer's defined benefit plans — terminated or not — count as one plan, and all of its defined contribution plans count as one plan. (2) A multiemployer plan is the exception: it is never combined with a non-multiemployer plan when applying the compensation-based limit, and never combined with any other multiemployer plan for this section's limits generally.

(g) Aggregation of plans. Apart from the multiemployer exception in (f)(2), the IRS must write regulations that disqualify one or more of an employer's plans, trusts, contracts, accounts, or bonds — for participants under common control as defined in section 414(b) or (c), modified by subsection (h) — until combined benefits or contributions no longer exceed this section's limits. Those regulations must make sure a terminated plan is disqualified only after every other plan has already been disqualified.

(h) 50 percent control. When section 414(b) and (c) common-control rules are applied for purposes of this section, "more than 50 percent" replaces "at least 80 percent" everywhere it appears in section 1563(a)(1).

(i) Records not available for past periods. For periods before January 1, 1976 (or, if later, a plan's first plan year) where the records needed to apply this section don't exist, the IRS may write regulations setting alternate ways to figure the amounts for that period.

(j) Regulations; definition of year. The IRS must write whatever regulations are needed to carry out this section, including defining what counts as a "year" for its different purposes.

(k) Special rules.

(1) Defined benefit plan and defined contribution plan. Throughout the tax code, these terms mean a plan defined under section 414(i) or (j) that is also a section 401(a) qualified trust plan, a section 403(a) annuity plan, a section 403(b) annuity contract, or a simplified employee pension^*.

(2) Contributions to provide cost-of-living protection under defined benefit plans. (A) Under a "qualified cost-of-living arrangement," an employee's direct contribution isn't treated as an annual addition under subsection (c), and a benefit funded by money transferred in from a defined contribution plan (and already tested under (c)) is treated, for subsection (b) purposes, as coming from an employee contribution rather than being double-counted. (B) A "qualified cost-of-living arrangement" is one that adjusts a defined benefit plan's payments for inflation and meets requirements (C) through (F). (C) The adjustment must be based on actual post-retirement cost-of-living increases, measured against IRS-approved indexes, though the plan can guarantee at least a 3% yearly increase. (D) The arrangement must be elective, offered on the same terms to everyone, with the election available at least when a participant reaches earliest retirement age or separates from service. (E) It cannot show a pattern of discriminatory participation. (F) No "key employee" (as defined in section 416(i)(1), with a narrow carve-out for non-top-heavy plans) may take part.

(3) Repayments of cashouts under governmental plans. Repaying money (with interest) that was previously refunded after a governmental plan forfeited someone's service credit does not count toward this section's limits.

(4) Special rules for sections 403(b) and 408. A 403(b) annuity contract is treated as a defined contribution plan of every employer that has the required common control over the participant. Employer contributions to a simplified employee pension are likewise treated as defined-contribution-plan contributions.

(l) Treatment of certain medical benefits.

(1)–(2) Money put into an "individual medical benefit account" — a separate account inside a pension or annuity plan, set up for one participant, that can only pay section 401(h) medical benefits to that participant, their spouse, or dependents — counts as an annual addition under subsection (c), but is not also subject to the 100%-of-compensation part of that limit.

(m) Treatment of qualified governmental excess benefit arrangements.

(1) When checking whether a governmental plan meets this section, benefits paid through a "qualified governmental excess benefit arrangement" don't count, and income earned on money backing that arrangement is treated as tax-exempt government income under section 115. (2) For income tax purposes, amounts a participant receives from such an arrangement are taxed as if the arrangement were a nonqualified deferred-compensation plan run by a taxable corporation^*. (3) A "qualified governmental excess benefit arrangement" is the part of a governmental plan that (A) exists solely to pay the part of a participant's benefit that this section's limits would otherwise block, (B) never lets the participant choose to defer compensation into it, and (C) pays those extra benefits only from a trust set up solely for that purpose, if a trust is used at all.

(n) Special rules relating to purchase of permissive service credit.

(1)–(2) If a participant in a governmental defined benefit plan pays to buy "permissive service credit," this section's requirements are satisfied either by treating the resulting extra accrued benefit as an annual benefit under subsection (b), or by treating the contributions as annual additions under subsection (c) — whichever the plan uses — and the plan won't fail the reduced early-retirement limit or the 100%-of-compensation limit solely because of this. (3) "Permissive service credit" is service credit the plan recognizes for benefit purposes that the participant hasn't already received, and can only get by making a voluntary extra contribution no larger than what's needed to fund^* the credit — this can include credit for periods with no actual service, or credit that boosts benefits for service already being credited. A plan fails this section if it counts more than 5 years of "nonqualified" service credit, or counts any nonqualified credit before the employee has at least 5 years of plan participation. "Nonqualified service credit" is any permissive credit other than for U.S., state, or local government employment (including certain leave), employment at a K-12 school under section 170(b)(1)(A)(ii), employment with an association of such government employees, or military service outside the special rules of section 414(u) — except that even these government or school jobs count as nonqualified if crediting them would let the participant collect a retirement benefit for the same service under more than one plan. Special trustee-to-trustee transfer rules under sections 403(b)(13)(A) and 457(e)(17)(A) are not subject to the 5-year nonqualified-credit cap, and this title's usual distribution rules for the receiving governmental plan apply to any transferred amounts and the benefits they fund.