A floor offset plan is the defined benefit part of a pair of plans whose benefits are coordinated. The other plan is a defined contribution plan (usually a profit sharing plan, sometimes with a 401(k) feature). The floor offset plan provides a minimum guaranteed benefit (or “floor” benefit) from both plans combined. A total benefit based on compensation and service is described in the floor offset plan and is reduced (or “offset”) by a benefit that is equivalent to the account accumulated as a result of employer contributions to the defined contribution plan. After this reduction, the floor offset plan pays what is left and the total benefit from both plans adds up to the total benefit described in the floor offset plan.
In some cases the benefit equivalent to the defined contribution account is larger than the guaranteed minimum benefit. In this case, no benefit is paid by the floor offset plan, but the total benefit (in the form of the defined contribution account) is equivalent to more than this minimum.
In many cases, floor offset plans can be designed so that only the business owner and other favored employees receive any benefit from the floor offset plan. This happens because the defined contribution account fully offsets the minimum benefit for everyone else and the plans are combined to pass non-discrimination requirements of the Internal Revenue Code. In order for this to work, the non-favored employees must, in general, be younger than the owner and other favored employees and the non-favored employees must receive a minimum contribution to the defined contribution plan (generally between 5% and 7.5% of pay).
Because the floor offset plan is a defined benefit plan and is subject to defined benefit plan limits on benefits, it can provide much larger benefits and annual deductible contributions than a defined contribution plan alone for an older business owner.
For the business owner who already sponsors a 401(k) plan, a floor offset plan offers the potential to substantially increase the amount the owner can set aside each year with little or no additional cost for other employees.
Contact us today if you think a floor offset plan might be a good fit for your business.