Aligning a Plan Year with the Calendar Year: What Does It Mean?

Created by Kelly Knudsen, Modified on Mon, 12 Aug at 9:29 AM by Kelly Knudsen

When managing an ERISA health or retirement plan, one of the first decisions an employer must make is determining the plan year. This 12-month period dictates when the plan's financial activities, compliance checks, and participant enrollments are tracked and reported. A plan year can start on any day of the year, but when it “aligns with the calendar year,” it means the plan’s reporting period begins on January 1st and ends on December 31st [1] [2].

Aligning a plan year with the calendar year has distinct advantages. For starters, most tax-related activities, such as W-2 reporting and 1095-C filings, are based on the calendar year. When the plan year coincides with these dates, it simplifies the administration and reporting process. Employers can synchronize their plan’s record-keeping, participant notices, and compliance deadlines with standard tax filing schedules, reducing the risk of missing important deadlines or filing inconsistencies [1] [3].

This alignment can also make life easier for plan participants. Employees often find it simpler to understand their benefits and track contributions when they follow a familiar calendar year. Whether it’s contributing to a retirement plan, utilizing health benefits, or planning for the following year’s open enrollment, everything fits neatly into the January-to-December framework they’re accustomed to [4].

However, there are scenarios where aligning the plan year with the calendar year may not be the best fit. For example, some businesses operate on a fiscal year that differs from the calendar year, particularly in industries with seasonal variations. In such cases, aligning the plan year with the fiscal year could better match the business's cash flow and budgeting practices. Additionally, a non-calendar plan year might offer strategic advantages in terms of plan testing and compliance, particularly for highly compensated employees [2] [4].

Ultimately, the decision to align a plan year with the calendar year should be made based on the specific needs of the business and its employees. While the simplicity and convenience of a calendar-year plan make it a popular choice, other options may offer benefits that better align with a company's financial practices and goals [1] [5].

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References

[1] Decent. (2023, November 17). Understanding "Plan Year" Vs "Calendar Year" - Decent health plan. Retrieved from https://www.decent.com/blog/understanding-plan-year-vs-calendar-year-key-health-insurance-terms-defined

[2] McGriff Insurance. (n.d.). Short Plan Year - McGriff Insurance. Retrieved from https://www.mcgriff.com/content/dam/bbt/mcgriff/pdfs/compliance/short-plan-year-3-22.pdf

[3] BDO USA. (2024). 2024 ERISA Deadlines and Important Dates Calendar. Retrieved from https://www.bdo.com/insights/assurance/erisa-2024-requirements-calendar

[4] Arthur J. Gallagher & Co. (2020). Short Plan Year/Early Renewal Considerations. Retrieved from https://vehi.org/client_media/files/05-Short_Plan_Year-Early_Renewal_Considerations%2805-2020%29.pdf

[5] Newfront. (2024). 2024 ERISA for Employers Guide. Retrieved from https://pages.newfront.com/rs/209-OQW-293/images/Newfront_ERISA_for_Employers_Guide.pdf