Cash balance floor offset design

[Guest archon]

I am struggling to design a floor offset cash balance plan with equal account additions for two owners who are different ages.

Everyone gets 7.5% in the defined contribution plan, including the owners, in hopes that will let me pass the meaningful benefit requirements for 401(a)(26) without having projected benefits for anyone other than the owners after the floor offset is applied.

I understand I also need to apply the offset on the same basis to everyone. Basically, my problem is how to state the offset so that owners get 7.5% in the defined contribution plan and 32.5% in the cash balance plan after the offset.

My "first shot" at that was to say the 7.5% directly offsets the cash balance addition, defined as 7.5% for group 2 and 40% for group 1. I am told though that I cannot simply offset the addition.

Can I instead say the maximum offset is the account coming from the first 7.5% in the cash balance formula?

[Blinky the 3-eyed Fish]

The person that told you you could not offset the addition, did he/she give a reason, cite, anything? I am curious, without researching anything, why.

I am not sure what you mean by your last question.

[Guest archon]

No cite. Person is a regional guru on such matters, so I did not challenge it. I will do so if I get the opportunity.

I guess it made some logical sense to me. Saying someone benefits in the cash balance plan for 401(a)(26) purposes when all they get is an immediate and permanent "offset" (now you see it, now you don't) of the contribution seemed "iffy" from the start to me. The reg says you can offset either by contributions or benefits, but I guess maybe that is simply acknowledging that the plan used to offset could be a defined contribution plan or a defined benefit one, not that you can literally offset the account addition in a cash balance plan by the contribution to a defined contribution plan.

I'd love to be wrong on that though.

My last question was trying to get at how to actually accomplish what truly would seem to benefit (in non-technical usage of the word anyway) the fully offset employees. The benefit they are getting is a floor under the return on their defined contribution plan allocations. If they earn less than the testing interest rate over the long haul, a cash balance benefit will magically appear, all other things being equal.

If that works, it is "how to state it" that escapes me.

Thanks for the response.

[Blinky the 3-eyed Fish]

I took a quick look through 1.401(a)(26)-5 trying to find something I thought would preclude what you are trying to do, but couldn't find anything. Please report back to share what your source has to say.

As for your last comment, why not just reduce the cash balance allocation to group 2? Isn't your goal that the ancillary employees not end up with a net benefit? There is an IRS memo out there that says 0.5% is sufficient for 401(a)(26) purposes.

[Guest archon]

OK, I'll report back.

Good question on why I don't just reduce the cash balance allocation to group 2. In going back through the materials again (I'm new at this cash balance and floor offset stuff), I think I combined the rules for safe harbor floor offset arrangements under 1.401(a)(4)-8 with the 1.401(a)(26)-5 rules.

The safe harbor floor offset discussions say the offset must be applied to all employees on the same terms. I combined that with the part of the 401(a)(26) regs that said "The employees who benefit under the formula being tested also benefit under the other plan on a reasonable and uniform basis..." and created an unnecessarily tight squeeze. That is, I was making the defined contribution plan exactly the same for everyone and also wrongly forcing myself to do the offset on the same terms.

Just to review then, it looks like one way through this maze is to give everyone 7.5% in the defined contribution plan to pass the gateway and so I can count group 2 as benefiting under 401(a)(26) even if they don't end up with a cash balance plan benefit after the offset. I do, however, need to make the benefit BEFORE the offset .5% of pay as an annuity so the benefit is meaningful. For the cash balance accounts though, I can just give group 1 the 32.5% without any sort of offset, and then give group 2 the actuarial equivalent of .5% of pay and offset that by the defined contribution plan only for group 2. Sound right?

Thanks a million. Sometimes the best answer to a question is to challenge whether the question even needs asked at all.

[Blinky the 3-eyed Fish]

If you do what you propose in your next to last paragraph, you risk running afoul of 1.401(a)(26)-5(a)(2)(iii)(2) in that the offset doesn't apply to the owners. While this is open to interpretation on how this is applied, why not just increase the DB amount and offset it by the DC to get to the net 32.5%? That way you are safe.

Also, you are right that the 0.5% stipulated in the IRS memo was a benefit. I didn't make that clear.

[Guest archon]

Fair enough.

Thanks for your help!