However, there are numerous adjustments that must be made to these basic limits, including:
The $-limit must be Actuarially adjusted if the benefit starts earlier than age 62 or after age 65. Before age 62 the limit is decreased because the benefit is expected to be paid over a longer period of time, while after age 65 it is increased because the payment period is shorter. Example: for retirement age 55, the 2006 limit is $108,204 (based on certain Actuarial Assumptions)
If the Form Of Benefit is not just for the life of the participant, the limit is adjusted to recognize the difference in value of different forms of payment. The Lump Sum value of the benefit paid must be equal to that of the Life Only benefit. However, if the benefit is to be paid for the life of the participant and then their spouse's life (Joint And Survivor) the limits are not adjusted.
The $-limit is pro-rated if the participant has less than 10 years of Participation in the plan. The %-limit is pro-rated if the participant has less than 10 years of Service with the employer. That is, it takes a 10-year period to earn the maximum benefit levels.
In addition, there is a special $10,000 de minimis benefit that can be paid even if it is greater than the average compensation.
Bottom line: the adjustments to Defined Benefit plan 415 limits can be quite complex and require an Actuarial determination.
An additional note on a point of frequent confustion: this limit on retirement benefits directly impacts the maximum deductible contribution (see 404), but it is not a simple relationship. That is, the maximum contribution for a year is not $175,000 for 2006; it may in fact be more than that or much less. See the DBMinMax table for the resulting application of these various limits to a new plan sponsor depending on their current age and past service. This table shows the resulting maximum contribution and the minimum compensation needed to support that contribution.
Defined Contribution Plans
For Defined Contribution Plans, the amount of contributions and other additions added to a pariticipant's account for a year are limited. The limits are:
A typical limit for a small business owner is $15,000 401(k) deferral + $29,000 Profit Sharing contribution for a total of $44,000 (2006 limit, indexed). If the owner is over age 50, an additional $5,000 401(k) catch-up deferral can be contributed.
The scope of 415 limits extends only to a single employer, or more accurately, to a single Controlled Group or Affiliated Service Group (groups of related employers). That is, benefits earned previously when a participant was an employee at an unrelated company do not affect the benefits they can earn under their current plan. Or, if an individual works for a corporation and also has a side-business, benefits earned under the corporate plans do not affect their ability to set up a plan for their own business and to take full advantage of the 415 limits under their own plan.
In addition to the 415 limits on an individual's benefits, other limits on qualified plans can impact the practical maximum benefit or contribution a person can receive. These limits include 404 maximum deductible contribution limits, Non-Discrimination Requirements, and 401(a)(17) compensation limits.