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Benefit and Contribution Limits for Retirement Plans

January 13, 2023

Many companies provide qualified retirement plans. There are two main types of employer-sponsored retirement plans: defined-benefit plans and defined-contribution plans. A defined-benefit plan such as 401(k) and 403(b) provides a specific retirement benefit amount when employees retire; while, under a defined-contribution plan, employees contribute a portion of their gross salaries to invest in the funds for retirement over time, and an employer may choose to match the employee contributions. We would like to provide you with an overview of the comprehensive regulations regarding limits on contributions and benefits.

For defined benefit plans, the benefit limits cannot exceed the lesser of $265,000 for 2023 ($245,000 for 2022), or the participant’s average compensation for his or her high-three years of service (HTS). The HTS calculation should include the three consecutive calendar years during which the highest aggregate compensation was received.

For defined contribution plans, a plan sponsor may contribute the lesser of $66,000 for 2023 ($61,000 for 2022), or 100 percent of the employee’s compensation. These “annual additions” include employer contributions, employee contributions, and any reallocated forfeitures. Payments made to restore plan losses from a breach of fiduciary duty under ERISA and other applicable federal and state laws are exempt from the limits on annual additions.

For multiemployer plans, all benefits and annual additions must satisfy the limits on an aggregate basis for all employers. All employers contributing to a multiemployer plan are treated as a single employer when applying the restriction on compensation paid after severance. The final regulations also provide rules regarding cost-of-living adjustments, aggregating plans, the disqualification of plans and trusts, and the definition of the limitation year for compliance purposes.

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