LIMITATIONS - PLAN YEAR IS DIFFERENT THAN THE CALENDAR YEAR
Plan sponsors of defined contribution plans have a plethora of compliance and administration requirements, but those plans that decide to use an off calendar year end face additional compliance/administration issues. In a nutshell, there is no reason from a defined contribution compliance/administration perspective to use an off calendar year. However, some CPAs or CEOs seem to enjoy the ease of having the fiscal year tied to the defined contribution plan year (most will say it is easier to tie the profit sharing contribution incentive to the company results).
OFF PLAN YEARS COST MORE
If plan sponsors perform a cost-benefit analysis related to determining a calendar year end, it will become clear that using an off calendar year increases the costs of running the plan as well as increase the risk of errors related to administration and compliance. Polling recordkeeping service providers and TPAs, one of their most common issues is ensuring compliance services are performed timely for non-calendar year plans.
Ask any HR or payroll person involved in coordinating plan year end data, if they think off calendar year plans are easy. Just because it is a fiscal year end doesn't make their job easier related to the defined contribution plan. They must work with their payroll provider to provide not only a plan year annual census for their recordkeeping service provider/TPA, but they must also provide a calendar year census. Anyone involved with an off calendar year plan knows the limitations years are confusing and have created their own cheat sheet related to compensation and benefit limitations.
One of the major reasons for an off calendar plan year is based on the fiscal plan year. In other words, tying the profit sharing contribution to fiscal year performance. Although it seems logical from an internal PR perspective, most companies do not fund their profit sharing contribution immediately at the fiscal year end (and most fund it more than three months later). Based on our experience, the many companies with profit sharing contributions that have a fiscal year that differs with the defined contribution plan year have no public relation issues related to making a profit sharing contribution using a calendar year. In other words, a profit sharing contribution is a profit sharing contribution no matter what plan year date you use.
THE MANY REASONS FOR A CALENDAR YEAR END - ELIMINATE THE CONFUSION!If you have an off calendar year or are considering one, here is your limitations/tax year cheat sheet.
- Elective deferral limits – 402(g) and catch-up are always based on a calendar year (the IRS tax year).
- 415 Limitations – It is tested on a plan year basis, based on the plan year end. If your plan year end is June 2013, the annual limitation is 2013.
- Compensation Limits – It is based on the plan year beginning date. For a June 30, 2013 plan year end, the 2012 limitation is used (think of an annual profit sharing contribution calculation).
- Highly compensated employee (HCE) determination – This is extra confusing, as an HCE uses the look-back year compensation to determine HCE status. For an off calendar year plan an HCE is based on the look-back limit in effect on the first day of the look-back plan year. Thus, the 2011 limit will apply for determining HCEs for the plan year ending June 30, 2013.
- ADP/ACP Test Issues – Reclassifying a contribution to catch-up is based on the plan year end. Hence, for a June 30, 2013 plan year end, the 2013 catch up limit applies.
- Corporate tax year deduction – The plan year deduction is based on the plan year end. A company with a June 30, 2013 plan year end with a company contribution paid in shortly thereafter will deduct using a 2013 calendar year tax return.
- Form 5500 – The plan must use the Form 5500 for the year based on the first day of the plan year. A company with a June 30, 2013 plan year end will file their Form 5500 using the 2012 Form 5500.
- Top Heavy – The test is based on account balances using the first day of the plan year (another way of saying the last day of the preceding year).
POPULAR PRESS TRACKING OF INVESTMENTS IS BY TRADITIONAL QUARTER
Off calendar plan years that do not use standard investment quarters can create confusion to the participants, as participant statements are not delivered on a standard quarterly basis. The industry and national press use natural calendar quarters for running their major investment performance reviews (especially on the calendar year end). Yes, the trailing three months is reported in many places, however pick up a leading business journal or magazine and you will see their mutual fund ratings and reviews on the quarter and calendar year end.