Amount of annual limit for defined benefit plans

The amount of the annual defined benefit plan limit - payable annually in the form of a straight-life annuity - cannot exceed the lesser of (a) a fixed dollar amount, e.g., $160,000 with respect to 2002, adjustable annually, or (b) 100% of a participant's average compensation for the participant's highest three consecutive years. If a participant's benefit payment begins before the participant attains the Social Security retirement age, the dollar limit is adjusted so as to equal the actuarial equivalent of the benefit payable at the participant's Social Security retirement age.

If the benefits begin before age 62, the interest rate used in computing the benefit must comply with certain additional requirements. Finally, if a participant has accumulated less than ten years of plan participation, the maximum benefit is reduced by the application of a fraction, the numerator is the number of years of the participant's beneficiary accrual service and the denominator is ten. Just to make things even more complicated, a further exception applies which permits the payment of a $10,000 annual retirement benefit, reduced by the application of the service requirement fraction and subject to other conditions.