Floor Offset Arrangement FAQs
Floor Offset Arrangement
-
A Floor Offset Arrangement is a Defined Benefit Plan and Defined Contribution Plan that together provide a total benefit. The Defined Benefit Plan provides a minimum, or “floor”, benefit that is reduced (or offset) by a benefit equivalent to the Defined Contribution Plan account balance.
Back to top
-
A gross benefit based on compensation and service is defined in the Defined Benefit Plan and is reduced (or “offset”) by the value of employer contributions in the Defined Contribution Plan. After this reduction, the Defined Benefit Plan pays whatever net amount is left, if any.
In some cases, the value of employer contributions in the Defined Contribution Plan is larger than the guaranteed minimum benefit provided by the Defined Benefit Plan. In this situation, no benefit at all is paid by the Defined Benefit Plan, but the total benefit (in the form of the defined contribution account) is equivalent to more than this minimum floor.
Back to top
-
Floor Offset Arrangements can often be designed so that only the business Owner receives any benefit from the Defined Benefit Plan. Floor Offset Arrangements typically are the most efficient design in terms of directing the highest percentage of employer contributions towards the Owner’s own benefit.
Back to top
-
Like all qualified retirement plans, Floor Offset Arrangements must be tested annually to ensure that they don’t discriminate in favor of Highly Compensated Employees (HCEs) beyond what’s allowed by law. To do this, the benefits provided by both the Defined Benefit and the Defined Contribution Plans are tested together. Testing results are most favorable when HCEs are (in general) older than non-HCEs, and when non-NHCEs get their entire benefit through the Defined Contribution Plan. If testing fails in a given year, it must be corrected by giving smaller benefits to HCEs and/or giving larger benefits to non-HCEs.
Back to top
-
Defined Benefit Plans are required to provide a “meaningful benefit” to at least 40% of employees who have met statutory age and service requirements (typically, age 21 with one year of service). On the face of it, this appears to be problematic for Floor Offset Arrangements in which the business Owner is the only person receiving a non-zero benefit in the Defined Benefit Plan.
However, participants in Floor Offset Arrangements are considered to get a meaningful benefit in the Defined Benefit Plan, even if they have no net benefit in the plan, so long as employer contributions in the Defined Contribution Plan are “reasonable and uniform”. For example, if all participants get an employer contribution in the Defined Contribution Plan equal to 8% of pay, to a maximum of $10,000, that would be considered reasonable and uniform.
Back to top
