Understanding IRC Section 415 Limits and Key Issues

Bottom Line Up Front

• IRC Section 415 sets limits on retirement plan benefits and contributions, and exceeding them can trigger significant tax penalties and administrative complications.
• Defined Benefit and Cash Balance plans are especially vulnerable to overfunding, particularly when investment returns or contributions outpace allowable limits.
• Proactive monitoring—across funding, investments, and plan design—is essential to avoid surplus issues, stay compliant, and maintain long-term plan flexibility.

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IRC Section 415 governs the maximum benefits and contributions allowed in qualified retirement plans. These rules are designed to prevent disproportionately large tax-advantaged benefits and ensure plans operate within IRS guidelines. While the limits may seem straightforward at first glance, the operational impact, especially for Defined Benefit and Cash Balance Plans, can be significant.

What is IRC Section 415?

IRC Section 415 sets maximum benefit and contribution limits for qualified retirement plans to ensure compliance and prevent excessive tax advantages. The limits differ depending on whether the plan is a Defined Benefit (DB) plan or a Defined Contribution (DC) plan. 

• Defined Benefit (DB) Plans: Annual benefit is capped at $290,000 for 2026 for a life annuity at age 65, adjusted for retirement age, payment form, and service years. 
• Defined Contribution (DC) Plans: Annual additions (employee + employer contributions) are limited to $72,000 for 2026 (excluding catch-up contributions).

Why It Matters

Section 415 isn’t just a technical rule, it directly affects funding strategies, plan design, investments, and tax outcomes. Exceeding the limit can create major issues, including taxes, penalties, and administrative complexity. 

Examples of Key Risks

• Surplus Assets: If plan assets exceed the 415 limit, any excess at termination may face a 50% reversion tax assessed by the Internal Revenue Service (IRS), plus corporate income tax on the remainder — potentially a 90% effective tax rate. 
• Funding risks: Large contributions or high investment returns can push plans beyond allowable limits, requiring extended plan duration to absorb surplus. 
• Investment Strategy: Cash Balance Plans invested aggressively (e.g., 100% equities) often generate returns far above the intended crediting rate, accelerating surplus risk.

Common Challenges for Plan Sponsors

Even well-managed plans face recurring complexities under Section 415, including: 

• Managing contributions to prevent overfunding
  Especially in years with strong investment performance. 
• Handling early retirement factors
  Benefits must be actuarially reduced, and the calculations can be complicated. 
• Accounting for joint & survivor or other optional forms of benefit
  Payment forms must be converted to an actuarial equivalent of a straight life annuity for 415 testing. 
• Monitoring potential legislative changes
  For example, if cost-of-living adjustments (COLA) are frozen due to legislation, current limits could stagnate even while plan liabilities continue to increase. 

Best Practices for Staying Compliant

Plan sponsors can reduce risk by being proactive and building 415 monitoring into annual strategic planning. 

• Monitor Annually
  Compare projected DB benefits or DC contributions against annual 415 limits.
  
• Align Investments
  Investment policies for DB/Cash Balance plans should support—not conflict with—interest crediting assumptions and long-term funding strategies.
  
• Plan for the Long Term
  Consider how contributions, plan amendments, and demographics may impact compliance over time. 

Recommended Actions

1. Annual Compliance Review
   Conduct an annual audit of plan assets, contributions, crediting rates, and projected benefits to identify potential 415 issues early. 
2. Investment Policy Alignment
   Ensure investment strategies match plan objectives and avoid excessive growth that could create surplus. 
3. Contribution Planning
   Coordinate with your actuary to structure employer contributions that meet objectives without pushing the plan toward overfunding. 
4. Scenario Testing
   Model early retirement, optional forms of payment, and alternative plan designs to ensure 415 compliance in all circumstances. 
5. Legislative Monitoring
   Stay current on IRS updates, cost-of-living adjustments, and proposed policy changes that could affect benefit limits.

Bottom Line

IRS Section 415 limits are technical, nuanced, and often misunderstood—but compliance isn’t optional. With the right monitoring and planning, employers can maintain tax-advantaged status, avoid costly penalties, and ensure long-term plan sustainability. 

If you have questions about how Section 415 applies to your retirement plan, your Odyssey consultant is here to help.