What Is a Plan Year and Why Is It Important?
Understand the critical role of a plan year in benefit administration. Learn how this foundational period shapes plan operations, compliance, and participant benefits.
A “plan year” is a defined administrative period for employee benefit plans, such as retirement or health benefits. This established timeframe is used by employers to manage and track various aspects of their benefit offerings, ensuring proper operation and compliance.
Defining a Plan Year
A plan year is a specific 12-month period chosen by the plan sponsor for administering an employee benefit plan. This period does not always align with the standard calendar year (January 1 to December 31) or the employer’s fiscal year. For instance, a plan year could run from July 1 to June 30.
This 12-month timeframe establishes a consistent basis for tracking various plan provisions. These include determining employee eligibility for benefits, calculating contributions made by both employees and employers, and assessing vesting schedules.
Importance of a Plan Year
The plan year dictates the timing for numerous compliance and reporting obligations. For instance, it sets the schedule for annual non-discrimination testing and the filing of government forms, such as Form 5500, which is required for many plans under the Employee Retirement Income Security Act (ERISA). Form 5500 must generally be filed electronically by the last day of the seventh month following the end of the plan year.
The plan year also governs participant eligibility and contribution limits. It defines the period during which employees accrue service for eligibility into a plan and when their contributions, such as those to a 401(k) or Health Savings Account (HSA), are tracked against annual limits. The plan year also determines how and when benefits accrue and when participants become vested in employer contributions, meaning they gain a non-forfeitable right to those funds.
This consistent 12-month period is also essential for maintaining administrative regularity. It provides a clear framework for record-keeping, communicating plan updates and open enrollment periods to participants, and ensuring that all plan-related activities occur on a predictable schedule. This structure helps both employers and employees understand the rules and entitlements associated with their benefits.
Establishing a Plan Year
When an employee benefit plan is first created, the plan sponsor is responsible for designating the plan year. This chosen 12-month period is formally documented within the plan’s official plan document. While there is flexibility in selecting the initial plan year, it can be either a calendar year or a fiscal year that aligns with the employer’s financial reporting cycle.
Once established, the plan year generally remains consistent. However, circumstances may arise that necessitate a change to an established plan year. This process typically involves amending the plan document and often requires notification to federal agencies like the IRS or DOL, depending on the type of plan. Such changes must usually be supported by a valid business purpose.
A “short plan year” occurs when a plan year is less than 12 months. This can happen when a plan is initially established, when it is terminated, or when an employer changes an existing plan year. For example, if a company decides to switch its plan year from July 1-June 30 to a calendar year, a six-month short plan year would occur from July 1 to December 31. During a short plan year, certain contribution limits may need to be prorated, and the plan still needs to complete its year-end compliance and reporting processes, including Form 5500 filings.