Termination of Floor Offset Plan

[Lorraine Dorsa]

I have a client with a floor offset plan who wants to terminate the DB portion of the plan and let the MP portion continue.

His issue is that only 2 participants now have a benefit under the DB portion of the plan, the rest are fully offset.

These 2 participants are low paid new hires (this is a takeover, I have no idea why the plan was designed this way, but that's how it is, total DB plan assets are less than $12,000).

The client really doesn't want to make distributions to these 2 participants since it will cause him PR problems with all his other employees (all of whom are long service).

Question: If accruals are ceased under the DB portion of the plan but the plan is not terminated, are the DB benefits offset by the MP balance as of the date of the cease, or by the MP balance at the date of distribution?

If the benefits can be offset by the then current balances of the MP plan, it is likely that the benefits of all particpants will be fully offset by their MP balances within 2 or 3 years. The client would terminate the DB plan at that time (assets will be about $10,000 or so since he will pay administrative expenses from the plan assets for the next 2 -3 years), transfer 25% of the potential reversion to the MP plan and then pay the 20% reversion tax and ordinary income tax on the remainder.

What do you think? I haven't found anything to say one way or the other what a cease of accruals means in a floor offset plan.

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[SoCalActuary]

By freezing the DB plan, you can elect whether it is offset by future additions to the MP plan. You do end up with vesting issues, but it is probably moot. The DB still provides a minimum benefit until distributed. We have used floor offsets which only use "new money" in a new plan or separate account of an existing plan. Similarly, we have used floor offsets that only use "old money" that ignores new accruals. But you could certainly use the entire DC account as an offset.

With over-funding, you could also increase the participation span or benefit levels of the DB minimum plan to use up a portion or all of the excess assets, assuming you meet non-discrimination rules.