3% DC contribution as offset

Hi,

I recall seeing that an the contribution to the DC Plan that will serve to offset the DB Plan benefits (DB is floor offset plan) should be a minimum of 5% of comp. Therefore, to use 3% of comp as the DC Plan is not advisable. 1. Is this correct? 2. Or is this only so that the DB Offset plan is a safe harbor, so technically 3% can be used, however, the db plan will now be a NON safe harbor offset plan? Thank you very much for any insights from all the Pros out there.

Is the aggregation group top-heavy and using the 5% DC contribution to satisfy 416?  Is that what is causing concern? Because I don't think there is anything magical about 3%, 5%, x% allocation being used in a floor offset combo from a non-discrimination stand point.

Thank you again Lou. Your brilliance as always,  is appreciated. I seem to recall,  but could be wrong,  that if a DB offset plan is a SH offset plan than the plan is tested  before applying the offset. Therefore, if the DB benefit formula is a SH formula (ie unit accrual) then the plan automatically passes (irregardless of the benefits accrued for the NHCEs after applying the offset). However, in order for the DB Plan to be considered a SH offset plan, the offset contribution to the DC needs to be a minimum of 5% of comp? Again,  I may be wrong on this. Thank you very much in advance

Beyond my initial response it's not something I'm aware of, sorry can't help you further.

Lou, thank you. If you don't think that it's correct, then most likely it's not correct.

There is no minimum offset, but the offset should be Uniform in order to test 401a26 pre-offset. The 5% is simply a convenient level in order to pass TH minimum benefit requirements.

joef, thank you so much. The 5% DC contribution to  offset is to pass TH. If 3% of comp would be used as the DC Contribution, then TH will not necessarily be met? Thank you

I just want to clarify.

1. It seems that you can use 3% of comp as the DC Contribution to offset the DB Benefits, however, it is not advisable to use less than 5%?

2. What does the minimum contribution mean in the following quote ? "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)." ---Thank you very much for any insights on the above 2 questions.

One way to pass top heavy in a DB-DC combo plan is to increase to the 3% TH minimum in the DC plan to 5%. That is the significance of 5%.

The maximum gate-way for cross testing a DB/DC combo is 7.5% (though it can be less depending on highest HCE allocation rate). That is the significance of 7.5%.

Neither 5% nor 7.5% is a guarantee that the combined plan testing will pass 401(a)(4) but often it is depending on the demographics.

1 hour ago, SSRRS said:

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.

This is false. Misleading at best.

17 hours ago, C. B. Zeller said:

This is false. Misleading at best.

Thank you C.B. By the way this was a quote from a seemingly reputable company's website.

18 hours ago, Lou S. said:

One way to pass top heavy in a DB-DC combo plan is to increase to the 3% TH minimum in the DC plan to 5%. That is the significance of 5%.

The maximum gate-way for cross testing a DB/DC combo is 7.5% (though it can be less depending on highest HCE allocation rate). That is the significance of 7.5%.

Neither 5% nor 7.5% is a guarantee that the combined plan testing will pass 401(a)(4) but often it is depending on the demographics.

Thank you very much Lou. As always you sure are on top of your game. The reason for this post actually, is because a company wants to open a DB Plan and a 401k SH (3%) as well. The issue is, is it prudent to use the 3% non elective Safe Harbor to the 401k as the DC offset contribution or safer to stay away, since the DC Offset contribution will be les  than 5%? Thank you in advance.

Using a 3% non-elective safe harbor as a base is quite common as it guarantees no ADP testing failures but it's not generally enough to satisfy TH minimum or gateway on it's own. If you have no ADP testing concerns you don't necessarily need the safe harbor. Remember that the 3% SH can't have any hours or last day requirement so having it can often trigger an additional gateway contribution for people who terminate but are eligible for the SHNE.

You typically need an additional profit sharing contribution to satisfy one or more of top-heavy minimum benefit, gateway contributions, and or §401(a)(4) nondiscrimination requirements. That's where you as consultant need to understand the plan demographics, client objectives, and be able to explain the pros and cons of what they will be adding and the likely contribution ranges for various employees they will be seeing going forward and that some of them may be guaranteed because of how the IRS rules work on various nondiscrimination tests whether they like or not in the future.

Can we just please not use floor offset plans.  They are at best difficult for sponsors and at worst administrative nightmares for anyone involved. Asking for a friend.

On 9/30/2022 at 12:41 PM, SSRRS said:

Thank you C.B. By the way this was a quote from a seemingly reputable company's website.

"Seemingly" being the operative word there.

Snark aside, I googled the quoted bit and found the website being referenced. To be fair to them, the page does include a a brief discussion of what a floor-offset arrangement really is. It doesn't go into detail about the various pitfalls and unintended consequences that come along with floor-offsets, but that's to be expected from a marketing perspective.

All this does, however, highlight the dangers of using language loosely like that - it's very easy for people to take quotes and re-post them without context, which can change their perceived meaning and lead to misunderstandings.