Floor-offset plans are a unique plan design that pre-dates 401(k) plans that became permanent in 1980.
A floor-offset arrangement is characterized by two separate but related retirement plans. The cash balance plan is the “floor plan” and the profit sharing plan is the “offset plan”.
Eligible participants accrue a benefit in the cash balance plan and allocations in the profit sharing plan. If the annuitized benefit of the participant’s profit sharing account balance is greater than the accrued benefit of the cash balance plan then 100% of the participants benefit in the cash balance plan is offset by the benefit from the profit sharing plan. However, if the annuitized benefit of the participant’s profit sharing account balance is less than the benefit of the cash balance plan, then the participant will receive no less than the benefit of the cash balance plan.
The IRS’ prescribed safe harbor provisions for cash balance floor-offset arrangements require the following:
1.Contributions to the offset plan must be uniform for all participants.
2.Investment options must be uniform for all participants in the offset plan.
3.Benefits, rights and features must be uniform for all participants in the offset plan.
Contributions
As a general rule, the minimum employer contribution to a combo DB/DC plan is 7.5%, which often satisfies the top-heavy minimum and gateway requirements for a cross-tested plan. Assuming favorable employee demographics, this minimum contribution becomes the employer’s target contribution to the profit sharing plan. Since it must be applied uniformily to all eligible participants, the allocation in the cash balance is offset by the profit sharing allocation.
For example, an owner has a defined allocation of $120,000 in the cash balance plan (formula in the plan document), but receives a profit sharing offset contribution of 7.5% of compensation, $21,375, leaving a contribution of $98,625 that’s due to the cash balance plan.
The non-owner participants in the cash balance plan accrue a benefit equivalent to 0.5% of annual compensation. The profit sharing allocation more than offsets the cash balance plan accrual.
Investment Options
In order to satisfy the uniform investment options of the prescribed safe harbor provisions, participant direction of the profit sharing floor-offset contribution is restricted and not eligible for self-direction. The plan’s trustees or investment adviser manages the profit sharing floor-offset account balance on behalf of the participants.
Since the profit sharing floor-offset account may be managed in a more conservative manner, younger participants may want to consider investing the self-directed portion of their account more aggressively.
Benefits, Rights & Features
IRC 401(a)(4) prescribes methods for demonstrating that benefits, rights and features are non-discriminatory. Given the added complexity of floor-offset arrangements, the best practice is to maintain complete uniformity with all benefits, rights and features and therefore not relying on alternative methods to satisfy IRC 401(a)(4).
Enrollment Procedures
1.Online enrollment at erisa.com (plan specific URL)
2.Participant receives a confirmation email after enrolling
3.Retirement Assessment: During the enrollment process, participants who select the retirement assessment option will receive a follow-up email with a retirement assessment. The assessment includes the portion of their compensation that is expected to be replaced by the employer’s contribution, and what their deferral rate should be to achieve their retirement goal. Reassessments are sent out annually, usually in Q4.
