A floor offset design combines a defined contribution plan and a defined benefit plan to ensure employees receive a guaranteed minimum retirement benefit.
A Floor Offset is a retirement plan design that blends two types of employer-sponsored plans to provide both flexibility and security. In this structure, the employer maintains two plans working together:
(1) a defined contribution (DC) plan, such as a profit-sharing or money purchase plan, and
(2) a defined benefit (DB) plan that sets a minimum guaranteed retirement benefit called the floor benefit.
The idea is simple: your DC account grows based on contributions and investment performance, but if that account isn’t enough to provide the minimum retirement income promised by the DB formula, the DB plan “tops up” the difference. Because of this safety net, many employees view the floor offset approach as offering the best of both worlds — potential growth plus guaranteed stability.
How a Floor Offset Plan Works
To understand the floor offset, it’s helpful to picture the two plans working together:
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The defined contribution plan is the primary retirement savings vehicle. Your balance depends on contributions and market returns.
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At retirement, the plan converts your DC account balance into an equivalent annuity value using standard actuarial assumptions (interest rates and life expectancy).
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Separately, the defined benefit plan calculates your guaranteed floor benefit using its formula — often based on salary, years of service, or a combination.
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If the annuity value of your DC balance meets or exceeds the floor benefit, the DB plan owes you nothing.
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If the annuity value of your DC balance is less than the floor benefit, the DB plan provides an additional benefit to make up the difference.
Because the DB plan only pays when needed, it typically costs employers less than running a full traditional pension. Yet employees still enjoy a guaranteed minimum monthly income.
A Simple Example
Imagine an employee, Dana, who retires at age 65 with:
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A DC account balance of $350,000
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Actuarial conversion indicates this balance equals a $2,000 monthly annuity
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The DB plan formula promises a $2,500 floor benefit
In this case:
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The DC plan provides $2,000 per month (when converted to an annuity value).
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The DB plan steps in and pays an additional $500 per month to reach the floor benefit.
If Dana’s DC balance were higher and equaled a $2,600 monthly annuity, the DB plan would pay nothing, since the DC plan already exceeds the floor.
This design ensures employees never receive less than the DB minimum, while still benefiting from potential investment growth in their DC plan.
Why Employers Use the Floor Offset Approach
Employers often choose the floor offset model because it provides both cost control and employee security. Some key benefits include:
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Reduced pension liabilities compared to a full DB plan, since top-up payments occur only when needed.
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Stronger retirement outcomes for employees, who get a guaranteed minimum benefit.
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Flexibility in managing retirement benefits through the DC plan as the primary funding method.
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Predictability for employees who may worry about market volatility reducing their retirement income.
Who Benefits Most from a Floor Offset Plan?
This design works especially well for:
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Companies transitioning from traditional DB plans to more modern retirement structures.
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Employers who want to encourage employee savings but still offer a guaranteed baseline benefit.
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Workers who value a pension-style safety net but also prefer the portability and growth potential of a DC plan.
Employees gain peace of mind knowing their retirement income won’t fall below a set threshold, even if investment markets perform poorly.
Final Summary
A Floor Offset plan ensures employees receive a guaranteed minimum retirement income by combining a defined contribution plan with a defined benefit plan that provides a “floor” benefit when needed. It’s a cost-effective and secure structure used by employers who want to balance financial flexibility with predictable retirement outcomes. In short, the floor offset protects workers from market downturns while still offering growth potential — a valuable combination in today’s retirement landscape.
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