A floor offset arrangement is a defined benefit (DB) plan combined with a defined contribution (DC) plan such as a profit sharing plan to provide a total benefit. The DB plan provides a minimum guaranteed benefit (or “floor” benefit) from both plans combined. A gross benefit based on compensation and service is defined in the DB plan and is reduced (or “offset”) by the value of employer contributions in the DC plan. After this reduction, the DB plan pays whatever net amount is left, if any.
In some cases, the value of employer contributions in the DC plan is larger than the guaranteed minimum benefit provided by the DB plan. In this situation, no benefit is paid by the DB plan, but the total benefit (in the form of the defined contribution account) is equivalent to more than this minimum floor.
Floor offset arrangements can often be designed so that only the business owner and other favored employees receive any benefit at all from the DB plan. For this to work, non-favored employees must receive a certain minimum contribution level in the DC plan (generally between 5% and 7.5% of pay).
For the business owner who already sponsors a DC plan, adding a DB plan in a floor offset arrangement offers the potential to substantially increase the amount the owner can set aside each year with little or no additional cost for other employees.