Deduction Limit & Floor/offset arrangements

[Guest Ddalk]

For a floor/offset arrangement, deductibility is governed by IRC 404:

"the total amount deductible in a taxable year under such plans shall not exceed the greater of--

(i) 25 percent of the compensation. . .or

(ii) the amount of contributions made. . .to satisfy the minimum funding standard provided by section 412. . ."

I am not sure how to read this. For example:

floor/offset arrangement: 1HC $125,000 contribution under the DB plan (HC's excluded from PS plan), 2 NCs require a combined PS contribution projected at $15,000 (less than 25% of compensation for both NCs) to fully offset their benefit from the DB plan.

For the plan year, is the total deduction for this FOA $125,000?

If so, what happens to the combined PS contribution--is it ever deductible?

I appreciate any help with this matter.

[Blinky the 3-eyed Fish]

I know it's not polite to answer a question with a question, but here goes anyway.

Who set this plan up? It appears to be designed to provide the owner with a large DB contribution that will probably cause 404(a)(7) to be violated every year. So, perhaps there is more to the story. Was it set up to use the flip-flop method to avoid the 404(a)(7) problem?

Why is the PS contribution necessary? How much more do the NHCE's get in the DB plan if no PS contribution is made?