Plan Year Vs Calendar Year – A Comprehensive Guide

Introduction

Many people get confused between the terms plan year and calendar year, especially when it comes to employee benefits. In this article, we will discuss what plan year and calendar year mean, how they differ, and which one is better for you.

What is a Plan Year?

A plan year is a 12-month period during which an employee benefit plan operates. It can start on any date and end 12 months later. For example, if your employer’s plan year starts on January 1st, 2023, it will end on December 31st, 2023.

What is a Calendar Year?

A calendar year is a 12-month period that starts on January 1st and ends on December 31st. It is the most common way to measure time in the world and is used for various purposes, including taxes and financial reporting.

What is the Difference Between Plan Year and Calendar Year?

The main difference between plan year and calendar year is the starting and ending dates. While a calendar year always starts on January 1st and ends on December 31st, a plan year can start on any date and end 12 months later.

Which is Better – Plan Year or Calendar Year?

There is no clear answer to this question as it depends on various factors such as the type of employee benefit plan, the employer’s preferences, and the employee’s needs. However, we can discuss some pros and cons of each.

Plan Year Pros and Cons

Pros: A plan year can be customized to fit the needs of the employer and employees. It can be used to align with the fiscal year or the busy season of the business. It also allows for more flexibility in plan design and changes.

Cons: Changing the plan year can be confusing for employees and may require additional communication and education.

Calendar Year Pros and Cons

Pros: A calendar year is straightforward and easy to understand. It aligns with other time measurements such as taxes and financial reporting. It also allows for easier comparison of benefit plans.

Cons: It may not align with the employer’s business needs or the employee’s preferences. It also limits the flexibility in plan design and changes.

Question and Answer

Q: Can an employer change the plan year?

A: Yes, an employer can change the plan year by amending the plan document and providing notice to the employees.

Q: Can an employee choose the plan year?

A: No, an employee cannot choose the plan year. It is determined by the employer.

Q: What happens if an employee changes jobs with a different plan year?

A: The employee’s benefits will be prorated based on the time spent with each employer during the plan year.

Conclusion

Both plan year and calendar year have their pros and cons, and it ultimately depends on the employer’s and employee’s needs. Understanding the difference between the two can help you make an informed decision when choosing an employee benefit plan.