The limit is on the benefit
Under IRC 415(b), the yearly benefit a defined benefit plan pays at retirement, expressed as a lifetime income, cannot exceed the lesser of:
- $290,000 a year in 2026, adjusted each year for inflation, or
- 100% of your average pay for your highest three consecutive calendar years (high-3 average). Each year's pay is capped at that year's compensation limit, $360,000 for 2026.
Pay you earned in the business before the plan existed counts toward the high-3 average. For an S or C corporation owner, pay means W-2 wages. For a sole proprietor or partner it means earned income: net profit less half of self-employment tax, less the plan contributions themselves.
The ten-year phase-ins
Neither limit is available in full straight away. Each builds up over ten years, and the two build on different clocks:
- The dollar limit is multiplied by your years of participation in the plan, out of ten. In the plan's first year you can earn a benefit of up to one tenth of it, $29,000 a year of lifetime income.
- The pay limit is multiplied by your years of service with the business, out of ten. Years in the business before the plan started count here.
Neither can fall below one tenth. So an owner who has been in business for ten years or more is held only by the dollar phase-in. Someone in their first year of business, earning $150,000, is held to a tenth of that pay, $15,000 of benefit, until more service builds up.
Pay also sets a lifetime ceiling. With a high-3 average of $150,000, the benefit can never exceed $150,000 a year, however many years you participate. Earning $29,000 of benefit a year, that ceiling is reached in a little over five years, after which contributions fall away.
Why age matters so much
The actuary turns the benefit limit into a contribution in three steps:
- Pick a retirement age. Many one-person plans use 62, the earliest age at which the full dollar limit applies. The plan's normal retirement age is written into its document.
- Convert the benefit to a lump sum at that age. The law fixes the conversion at an interest rate of at least 5.5% and an IRS mortality table. At 62, a year's worth of the dollar limit converts to a lump sum about 13 times its size.
- Discount that lump sum back to today. The plan only needs to hold today what will grow into the lump sum by retirement, using the interest rates the IRS publishes for pension funding, called segment rates.
The fewer years to retirement, the less discounting there is, so the same benefit costs more to fund each year. That is why the figures climb steeply with age.
| Age | Cash balance plan | Solo 401(k) alone |
|---|---|---|
| 35 | $77,000 | $72,000 |
| 40 | $103,000 | $72,000 |
| 42 | $116,000 | $72,000 |
| 43 | $141,000 | $72,000 |
| 45 | $156,000 | $72,000 |
| 50 | $201,000 | $80,000 |
| 55 | $260,000 | $80,000 |
| 57 | $288,000 | $80,000 |
| 60 | $270,000 | $83,250 |
| 62 | $299,000 | $83,250 |
| 65 | $347,000 | $80,000 |
See the maximum at every age from 30 to 70.
The step between 42 and 43
The table jumps by about 22% between 42 and 43, where the normal step from one year to the next is around 5%. It is not an error.
Pension funding uses three interest rates, depending on how far away a payment is: one for payments within five years, one for payments five to twenty years away, and one for payments more than twenty years away. The third rate is the highest, about 6% in September 2026 against about 5.25% for the second.
At 42, retirement at 62 is exactly twenty years away, so the lump sum is discounted at the higher third rate, which makes today's cost smaller. At 43 it is nineteen years away and the lower second rate applies, so the cost rises by more than a normal year's worth. Rates move each month, so the size of the step changes, but it is always there at twenty years.
Why the figures dip after 57
The figures above assume at least five years between the start of the plan and retirement. From 58, that pushes the retirement age past 62, the horizon stops shrinking, and the first-year figure falls slightly for a few years. After 65 the dollar limit is increased for later retirement, so the figures rise again.
Some actuaries do not apply a five-year minimum, which gives higher figures from 58 on. Your plan's actuary decides the assumption, and it is written into the plan.
Your income sets a limit too
Whatever the actuary's figure, the money has to come from the business and the deduction has to fit its income:
- S and C corporations pay contributions out of the profit left after your salary. The benefit is based on W-2 pay, so a low salary means a low benefit, and salary cannot be added after December 31.
- Sole proprietors and partners cannot deduct more across all their plans than their earned income from the business, before those contributions (IRC 404(a)(8)(C)).
If you also have a Solo 401(k), employer profit sharing is generally held to 6% of pay in years you fund the cash balance plan. See using a cash balance plan with a Solo 401(k).
A range, not a single number
Each year the enrolled actuary certifies two figures:
- a minimum required contribution, which the business must pay within 8½ months after the plan year ends, and
- a maximum deductible contribution, the most the business can deduct.
You choose any figure between them. In the first year or two the range is often narrow. From then on, the maximum includes a cushion of 50% of the plan's funding target, so the range usually widens and many owners vary their contribution with how the business did. Whether a new plan may use the cushion in its first two years is not settled law, so careful designs leave it out at first.
Contributing more than the target in good years lowers the minimum later, and investment returns move future figures too. See minimum contributions and lean years.
Your own figure
The illustrations here assume maximum pay and a long history in the business. Your figure depends on your age, pay, years in business and other plans. The cash balance calculator runs the same rules on your numbers, and an actuary confirms the final range each year.