Question: What are the main considerations to be aware of when implementing a short plan year?
Short Answer: Employers should be aware of the documentation, filing, and prorated limits associated with short plan years.
General Rule: Moving to a New Plan Year Always Requires a Short Plan Year
The ERISA plan year and Section 125 cafeteria plan year generally needs to a rolling 12-month period.
However, a short plan year is permitted for a valid business purpose. This most commonly occurs when transitioning to a new plan year. In no case is a plan year longer than 12 months ever permitted.
- Employer’s plan year is 4/1 – 3/31.
- Employer is moving to a 1/1 – 12/31 calendar plan year.
- The plan must have a short plan year from 4/1 – 12/31 to transition to a calendar plan year.
- The plan cannot have an extended plan year beyond 12 months to transition to the calendar plan year—even if the insurance carrier’s policy term will extend beyond 12 months.
Wrap Plan Document and Wrap SPD
Employers will need to update the wrap plan document and wrap SPD to reflect the short transitional plan year, and then the subsequent ongoing new 12-month plan year.
For more information on distribution and timing requirements for SPDs:
Plans subject to the Form 5500 filing requirements will need to file a short plan year 5500 for the transitional short plan year. Part I, Line B of the Form 5500 includes a checkbox to designate “a short plan year return/report (less than 12 months).”
The Form 5500 will be due within seven months after the end of the short plan year. The Form 5500 requirement generally applies for plans with 100 or more covered participants (employees or former employees on COBRA) on the first day of the plan year.
For more information on whether a plan is subject to the Form 5500 filing requirements:
Employers must file for and pay the Patient-Centered Outcome Research Institute (PCORI) fee annually on IRS Form 720 by July 31 if they sponsor a self-insured medical plan.
The PCORI fee applies for short plan years. Therefore, employers with a self-insured medical plan will need to do a short plan year PCORI fee filing. The PCORI fee amount is prorated for the short plan year.
As with standard plan year, the PCORI filing due date is July 31 of the year following the last day of the short plan year.
For more information on the PCORI filing and fee requirements:
- Completing the Annual PCORI Fee by the July 31 Deadline
- ABD Office Hours Webinar: 2019 Year in Review (PCORI fee extended to 2029, Slide 15)
Part D CMS Creditable Coverage Disclosure
CMS requires employers to complete an annual online disclosure form within 60 days of the start of each plan year. The form confirms whether the prescription drug coverage under the plan is creditable for Medicare Part D purposes.
The CMS disclosure is required for short plan years in the same manner as any other plan year. Accordingly, the employer will need to complete the online disclosure within 60 days of the start of the short plan year, and within 60 days of the subsequent new 12-month plan year.
For more information on the Medicare Part D Creditable Coverage notification rules:
- Annual October 15 Deadline for Medicare Part D Notice of Creditable Coverage
- Annual CMS Disclosure of Creditable Coverage Status Within 60 Days of the Start of the Plan Year
Section 125 Cafeteria Plan: General Requirements
As with the wrap plan document and wrap SPD, the cafeteria plan will need to be updated reflect the short transitional plan year, and then the subsequent ongoing new 12-month plan year.
Even where the insurance carriers have agreed to a policy period that extends beyond 12 months, the employer will still need to offer the ability for employees to change their elections at the start of the transitional short plan year. In other words, employees cannot be locked into an irrevocable election for any period longer than the standard 12-month plan year.
A common workaround for this situation is a simple passive OE approach for the start of the transitional short plan year where most employees maintain their current election for the additional months without any affirmative steps required. This can be as simple as a notice to employees that their elections will continue the remainder of the transitional short plan year unless they request otherwise.
For more information on Section 125 cafeteria plan terms and elections:
Section 125 Cafeteria Plan: Health FSA
The ACA originally limited health FSA salary reduction contributions to $2,500 per plan year, adjusted annually for inflation. For plan years beginning on or after January 1, 2020, the limit is $2,750.
IRS guidance confirms that this salary reduction contribution limit must apply on a prorated basis for a short plan year based on the number of months in the short plan year.
For example, the maximum health FSA contribution limit for a short plan year from 4/1 – 12/31 would be 9/12 (three-quarters) of the standard limit. In that example, there would be a maximum salary reduction limit of $2062.50 (based on the 2020 limit of $2,750) for the nine-month short plan year.
For more information on the health FSA salary reduction contribution limit:
- Health FSA Salary Reduction Contribution Limit for Short Plan Years
- 2020 Health FSA Salary Reduction Contribution Limit Increased to $2,750
Section 125 Cafeteria Plan: Dependent Care FSA
Unlike the health FSA, the $5,000 dependent care FSA maximum (or $2,500 if married filing separately) is based solely on the calendar year. In other words, there is no requirement to cap dependent care FSA elections at a prorated limit for a short plan year.
Nonetheless, best practice generally is to impose a prorated dependent care FSA contribution limit for a short plan year. Otherwise, it can be difficult to monitor and prevent employees from exceeding the $5,000 calendar year maximum.
For example, take an employer with a short plan year from 4/1 – 12/31. If the employer permitted the full $5,000 dependent care FSA election for the short plan year, it would have to carefully monitor whether employees would exceed the calendar-year $5,000 limit based on dependent care FSA amounts from the 1/1 – 3/31 period at the end of the previous plan year. Prorating the contribution limit for the short plan year avoids that unnecessary administrative burden for the employer and third-party administrator.
Prop. Treas. Reg. §1.125-1(d):
(d) Plan year requirements.
(1) Twelve consecutive months. The plan year must be specified in the cafeteria plan. The plan year of a cafeteria plan must be twelve consecutive months, unless a short plan year is allowed under this paragraph (d). A plan year is permitted to begin on any day of any calendar month and must end on the preceding day in the immediately following year (for example, a plan year that begins on October 15, 2007, must end on October 14, 2008). A calendar year plan year is a period of twelve consecutive months beginning on January 1 and ending on December 31 of the same calendar year. A plan year specified in the cafeteria plan is effective for the first plan year of a cafeteria plan and for all subsequent plan years, unless changed as provided in paragraph (d)(2) of this section.
(2) Changing plan year. The plan year is permitted to be changed only for a valid business purpose. A change in the plan year is not permitted if a principal purpose of the change in plan year is to circumvent the rules of section 125 or these regulations. If a change in plan year does not satisfy this subparagraph, the attempt to change the plan year is ineffective and the plan year of the cafeteria plan remains the same.
(3) Short plan year. A short plan year of less than twelve consecutive months is permitted for a valid business purpose.
Prop Treas. Reg. §1.125-5(e)(1):
(e) Required period of coverage for a health FSA, dependent care FSA and adoption assistance FSA.
(1) Twelve-month period of coverage—in general. An FSA’s period of coverage must be 12 months. However, in the case of a short plan year, the period of coverage is the entire short plan year. See paragraph (d) in §1.125-1 for rules on plan years and changing plan years.
DOL Form 5500 Instructions:
Short Years. For a plan year of less than 12 months (short plan year), file the form and applicable schedules by the last day of the 7th calendar month after the short plan year ends or by the extended due date, if filing under an authorized extension of time. Fill in the short plan year beginning and ending dates in the space provided and check the appropriate box in Part I, line B, of the Form 5500. For purposes of this return/report, the short plan year ends on the date of the change in accounting period or upon the complete distribution of assets of the plan. Also see the instructions for Final Return/ Report to determine if “the final return/report” box in line B should be checked.
IRS PCORI Fee FAQ:
Q12. Does the PCORI fee apply to an applicable self-insured health plan that has a short plan year?
A12. Yes, the PCORI fee applies to a short plan year of an applicable self-insured health plan. A short plan year is a plan year that spans fewer than 12 months and may occur for a number of reasons. For example, a newly established applicable self-insured health plan that operates using a calendar year has a short plan year as its first year if it was established and began operating beginning on a day other than Jan. 1. Similarly, a plan that operates with a fiscal plan year experiences a short plan year when its plan year is changed to a calendar year plan year.
Q13. What is the PCORI fee for the short plan year?
A13. The PCORI fee for the short plan year of an applicable self-insured health plan is equal to the average number of lives covered during that plan year multiplied by the applicable dollar amount for that plan year. Thus, for example, the PCORI fee for an applicable self-insured health plan that has a short plan year that starts on April 1, 2013, and ends on Dec. 31, 2013, is equal to the average number of lives covered for April through Dec. 31, 2013, multiplied by $2 (the applicable dollar amount for plan years ending on or after Oct. 1, 2013, but before Oct. 1, 2014).
Q14. What is the PCORI fee due date for the short plan year?
A14. The due date for the PCORI fee is July 31 of the year following the last day of the plan year (including a short plan year).
CMS Creditable Coverage Disclosure Instructions:
- Timing of Creditable Coverage Disclosure from Entity to CMS
As outlined under 42 CFR 423.56(e) and (f), and the guidance published by CMS on January 10, 2006, a disclosure of creditable coverage status must be made to CMS on an annual basis and upon any change that affects whether the drug coverage is creditable.
At a minimum, disclosure to CMS must be made at the following times:
- For plan years that end in 2006, disclosure of creditable coverage status must have been provided no later than March 31, 2006.
- For plan years that end in 2007 and beyond, disclosure of creditable coverage status must be provided within 60 days after the beginning date of the plan year for which the entity is providing the disclosure to CMS.
- Within 30 days after the termination of the prescription drug plan ; and
- Within 30 days after any change in the creditable coverage status of the prescription drug plan.
- Period covered by Disclosure Notice. An entity is required to provide the Disclosure Notice to CMS on an annual basis. Each entity must provide the beginning and ending calendar date(s) of the Plan Year for which such entity is providing the disclosure to CMS.
For purposes of the Disclosure Notice to CMS, CMS defines “Plan Year” as the beginning and ending date of the entity’s annual renewal or contract period.
These dates must be entered using two (2) digits for the month, two (2) digits for the day and four (4) digits for the year and the date field must be entered using the forward slash (/) between the month and day and between the day and year. (MM/DD/YYYY). Failure to enter the date in this manner will result in an error message when submitting the disclosure form.
(2) Limitation of exclusion.
(A) In general. The amount which may be excluded under paragraph (1) for dependent care assistance with respect to dependent care services provided during a taxable year shall not exceed $5,000 ($2,500 in the case of a separate return by a married individual).
Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship. Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).