Ms. X is 53 and owns a small company with five employees. Her employees range in age from 35 to 43 and have compensation that ranges from $30,000 to $50,000 and totals $200,000. Ms. X’s pay is in excess of $170,000 (the maximum compensation that can be recognized for the 2000 plan year).

Ms. X established a 401(k) profit sharing plan when she started the business. She is committed to (and her employees have come to expect) a 10 percent profit sharing contribution. Ms. X believes this is the right level of benefit and does not want to raise or lower it. As a result, an employer contribution of $37,000 is made for the year. In addition, Ms. X defers the maximum $10,500, and her employees defer $8,000 in total. Ms. X would love to shelter another $35,000, but adding another defined contribution plan would only allow her to receive another $2,500 in contributions, which would bring her total annual additions to the $30,000 individual limit.

However, since IRC §415(e) repeal Ms. X no longer has to be concerned about combined plan benefit limits and can accrue benefits in a DB plan on top of the $30,000 annual addition limit. Ms. X can establish a defined benefit plan that is part of a floor offset arrangement with her profit sharing plan. Because of the ages of her employees, all of the benefit from a DB plan with a $35,000 annual contribution would go to Ms. X. So by adding a DB plan Ms. X can nearly double the corporate deduction and more than double the money she is deferring for retirement, all with absolutely no increase in employee cost.

A floor offset arrangement will not always have such a dramatic impact. The results depend on the participant demographics of a given employer. But such arrangements are often the answer for the owner who wants to substantially increase his/her benefits without increasing employee benefits that are already at the desired level.