Aug 08, 2023
Compliance Issues for Short Plan Years
When there is a need to discontinue benefit offerings, or a need to adjust the benefit plan year, employers may need to run a short plan year. Short plan years are generally permitted for valid business reasons (e.g., business reorganization or change in insurers). In some cases, this is known far enough in advance that the employer can announce the short plan year as employees are making elections for the year, which certainly makes the transition easier. But in other cases, employers may have to cut a plan year short after employees have enrolled for a full plan year. In either situation, for employers who need to run a short plan year, there are several compliance considerations, which are set forth in the checklist below.
It is possible to cut a plan year short after the plan year has begun. This is sometimes unavoidable when an employer cannot pay the premiums or goes out of business. It might also be required in connection with a merger or acquisition. If the plan year is cut short (rather than being communicated as a short plan year up front), we generally recommend that the change be communicated at least 60 days in advance in accordance with notice of modification rules.
ERISA
ERISA rules prohibit a plan year longer than 12 months. The plan year should generally be 12 months, but short plan years are permitted for valid business reasons. So, for example, to transition to a different plan year, it would be necessary to run a short plan year during the gap; it is not possible to extend a plan year beyond 12 months to handle the transition.
Plan Documents. The ERISA plan documents, including the summary plan description (SPD) and summary of benefits and coverage (SBC), probably define the plan year as a 12-month period, so amendments may need to be made to the documents to allow for a short plan year and to adjust the plan year dates going forward, if applicable. If a plan year is cut short (a mid-year change), a notice of modification should be provided 60 days in advance of the plan year ending if at all possible. In addition, if the plan year is adjusted in the SPD to reflect a short plan year and/or new plan year, a summary of material modification (SMM) should be distributed. The SMM rules require distribution within 210 days following the end of the plan year, or within 60 days following adoption of the change if the change is a material modification. The notice of modification, if provided, could also serve as the SMM.
Form 5500s. If the employer is subject to 5500 filing, they will need to do a special 5500 filing for the short plan year no later than 7 months after the end of the short plan year.
§125 Cafeteria Plan
§125 rules also prohibit a plan year longer than 12 months. Employees should be allowed to make new elections at least every 12 months.
Plan Document. The cafeteria plan document may need to be amended to reflect a short cafeteria plan year and a change in plan year going forward, if applicable.
Employee Elections. For cafeteria plan pre-tax elections, rules require that employee elections are only good for a maximum of 12 months, but that does not mean that an employer must have a full open enrollment for every plan year. §125 rules allow “default” or “rolling" enrollments that would default the employee into the same election they currently have so long as employees are given the opportunity to make a change if they want to do so. This can simplify things for an employer who is transitioning to a new plan year. For example, the employer could communicate to employees that there will be a short plan year, and that elections for the short plan year will default to match what is currently in place unless the employees notify the employer otherwise. Then a full open enrollment could be held again for the next full plan year.
Health FSA. Salary reductions (employee contributions only, not employer contributions) are limited to $3,050, in 2023, for a 12-month plan year. If the employer started off with elections divided over 12 months, but then cut the plan year short, the elections are then prorated automatically when the contributions are cut short. However, if the employer starts off with a short plan year, the rules require that the limit on employee contributions be prorated based on the number of months in the short plan year (e.g., 5/12 of $3,050 for a 5-month short plan year in 2023). Cutting the plan year short can result in forfeited employee contributions for those participants planning to incur expenses later in the year, or an inability for the employer to collect remaining contributions for expenses reimbursed early in the year. Therefore, if at possible, it can certainly make the transition easier to plan for a short plan year in advance and have employees make elections accordingly (on a pro-rated basis for a shorter time frame).
Dependent Care Account Plan (DCAP). DCAP reimbursements (from employee or employer contributions), cannot exceed $5,000 for the calendar year. This limit is per employee (or family, if married) and not necessarily tied to the employer or the employer's DCAP plan year. Individuals should not receive more than $5,000 in tax-favored reimbursement for qualifying daycare expenses in any calendar year. For a short plan year, the employer is not required to pro-rate the $5,000 contribution limit, but the employer may want to do so to help employees stay within the $5,000 reimbursement limit permitted for the calendar year.
HSAs
HSA contribution limits include both employee and employer contributions and are always calculated on a calendar-year basis. Individuals may contribute up to 1/12 of the annual maximum for each month they are HSA-eligible (i.e., enrolled in qualifying HDHP coverage, no other disqualifying coverage, and cannot be claimed as another's tax dependent). Therefore, the ability to make a full year’s contribution to an HSA is not tied to the employer’s plan year, or short plan year, but instead is based on how many months during the calendar year that the individual was enrolled in a qualifying HDHP.
§4980H (Employer Mandate) Requirements
Applicable large employers (50 or more FTEs) are required to make an offer of medical coverage at least annually to full-time employees to satisfy the employer mandate. Therefore, if the employer runs a short plan year to move to a different plan year, the employer will likely have to make an offer of medical coverage for the short plan year and then again for the next full plan year to ensure that an offer of medical coverage is made for all months in the year. NOTE: As discussed above under §125 election rules, the employer could offer a passive enrollment for the short plan year, allowing employees to maintain previous elections for enrollment or a waiver
PCORI Fees
PCORI fees are due for the short plan year if the plan is self-funded. The fee should be reported and paid by July 31st in the year following the end of the short plan year. It is necessary to pay the full fee regardless of whether it is a short plan year or a full plan year; the fee isn't prorated. For example, if the employer uses the monthly snapshot method to determine average covered lives, and the employer had a 5-month short plan year, the employer should use counts from those 5 months and divide by 5.
COBRA
The Treasury Regulations provide that the determination period must be a 12-month period that is applied consistently from year to year, and the COBRA premium must generally be fixed for the determination period. It would be okay to charge something less than the set COBRA premium, but generally not something more. If the employer is changing to a new plan year, the employer should consider how COBRA rates will be handled for the short plan year. The COBRA regulations do not address changes to a plan's determination period. However, assuming the group is changing its plan year due to a valid business reason (with an accompanying amendment to the plan for the change in plan years), an argument could be made that the plan may select a new determination period and adjust COBRA rates accordingly for the short plan year and then again upon the new full plan year. Alternatively, a more conservative approach would be to maintain the COBRA rates (no increase) for the short plan year and wait to increase the COBRA premiums, if applicable, for the new full plan year.
CMS Creditable Coverage Reporting
- Reporting on creditable coverage status is required within 60 days of the plan year beginning, including for short plan years.
- Reporting is also required within 30 days of plan termination (e.g., for a plan year that is cut short).
The following organizations offer services to assist with WRAP documents.
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