Covered compensation and the 2026 limits

As retirement plan professionals prepare for the 2026 plan year, the Internal Revenue Service has released the updated covered compensation figures in Revenue Ruling 2026-1. These numbers are fundamental for any qualified retirement plan that provides different contribution levels above and below the Social Security wage base, as permitted under Internal Revenue Code §401(l). With the Social Security taxable wage base rising to $184,500 for 2026, understanding these updated figures is crucial for planning and compliance.

What is covered compensation?

Covered compensation is a standardized figure representing a career-average of an employee's earnings subject to Social Security taxes. Specifically, the IRC defines it as the average of the Social Security contribution and benefit bases for the 35-year period ending in the year an employee reaches their Social Security retirement age. Because this calculation is based on historical data and statutory assumptions for future years, the IRS provides standardized tables for use in administering qualified retirement plans that integrate with Social Security under §401(l).

The role of covered compensation in plan design

Covered compensation is the cornerstone of "permitted disparity," also known as Social Security integration. This plan design feature allows employers to provide higher contribution or benefit rates for employee compensation that exceeds a specified "integration level." This level is often, but not required to be, set at or near an employee's covered compensation amount.

The rationale for permitted disparity is that Social Security benefits are progressive, replacing a higher percentage of pre-retirement income for lower-paid workers than for higher-paid workers. By allowing plans to provide greater benefits on pay above the covered compensation limit, the rules help employers create more balanced total retirement benefits (qualified plan plus Social Security) across all pay levels.

Understanding the 2026 tables

Revenue Ruling 2026-1 provides two sets of tables for determining covered compensation for the 2026 plan year. A plan must adhere to the method specified in its plan document.

1. The unrounded table: This table provides the precise, calculated covered compensation amount for each year of birth.
2. The rounded table: For administrative simplicity, this table groups years of birth and rounds the corresponding covered compensation amounts.

Practical examples for 2026

• An employee born in 1965 has an unrounded covered compensation of $127,188. Using the rounded table, this amount is $126,000.
• An employee born in 1985 has an unrounded covered compensation of $176,424, which is $177,000 on the rounded table.
• For younger workers, the figure aligns with the current taxable wage base. For employees born in 1993 or later, their unrounded covered compensation is the full $184,500. The rounded table sets this amount at $184,500 for anyone born in 1991 or later.   

For any employee whose 35-year measurement period has not yet begun, their covered compensation is simply the Social Security taxable wage base in effect for the current plan year ($184,500 for 2026).

Action steps for retirement plan professionals 

1. Verify plan documents: The first step is to confirm whether the plan document specifies the use of the rounded or unrounded covered compensation tables. Using the wrong table is a common administrative error that can lead to qualification issues.
2. Update administrative systems: Coordinate with plan sponsors, third-party administrators (TPAs) and payroll providers to ensure that all systems are updated with the correct 2026 covered compensation figures and the new $184,500 taxable wage base.
3. Review nondiscrimination testing: The annual increase in these figures can directly impact nondiscrimination testing for plans using permitted disparity. Review and update testing projections to ensure the plan remains compliant.
4. Enhance participant communication: While participants do not need to understand the complex calculations, they should be able to understand why contribution or benefit rates may differ based on their pay level. Clear, simple communication can preempt questions and build trust in the retirement plan.

Covered compensation

Covered compensation rarely changes midyear, but it changes enough year to year so that professionals cannot afford to rely on last year’s numbers. Revenue Ruling 2026-1 provides the official figures for the 2026 plan year and serves as the authoritative reference point for compliance.

In retirement planning, details matter. Covered compensation may feel like a background calculation, but it shapes how benefits are allocated and how plans remain qualified. Staying current with IRS guidance keeps plans compliant and clients confident, which is the quiet work that defines good tax practice.