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Short Plan Years: What They Are and What They Mean

Practice Management

What is a short plan year? A recent blog post from DWC – The 401(k) Experts defines the term, but argues that what’s more important is why a short plan year exists.

The post points out that defining a short plan year is very easy: any plan year with fewer than 12 months. “Company-sponsored retirement plans are generally required to operate on a 12-month plan year,” they write. “From time-to-time, however, there are circumstances that cause a given year to be truncated.”

And those circumstances are really the key issue, DWC says. “The ‘what’ is not quite as helpful as the ‘how’ or the ‘why’?” they write. The reasons why a plan may truncate a plan year include:

  • Change of Plan Year.  Sometimes a plan’s tax year and its plan year may not coincide, which DWS notes “creates additional work and confusion.” A plan amendment that creates a short plan year can address that situation and make them align.
  • Establishment of a New Plan. Establishing a new plan after the first day of the year can result in a short plan year. However, notes DWC, even under those circumstances it still is possible that the new plan can use the first day of the year as the plan’s initial effective date.
  • A Plan is Discontinued.  If a plan is terminated or merged into another plan on any day other than the last one of the plan year, a short plan year will result.

Regardless of why a short plan year occurs, there are procedures that must be undertaken and there are considerations that must be kept in mind, the DWC post points out. These include:

  • compliance testing;
  • filing the Form 5500;
  • eligibility;
  • vesting; and
  • determining who is highly compensated.

And, DWC adds as a note of consolation, many of the challenges that having a short plan year poses are a one-time thing.

The full post is here.