401(k) plan sponsors can use this article to understand the difference between their plan year and their company’s fiscal year, why Gusto Retirement always uses a calendar year plan year, and what to expect if your plan currently runs on a non-calendar plan year.
A plan year is the plan sponsor-designated 12-month period a 401(k) plan uses to run its own recordkeeping, testing, and reporting. The plan document sets the plan year. While a plan sponsor can choose the calendar year, its company’s fiscal year, or another 12-month period entirely, all plans at Gusto Retirement define the plan year as the calendar year (Jan 1 – Dec 31).
Your company’s fiscal year is a separately tracked period of time. It’s the 12-month period your company uses for its own accounting and taxes, and it does not have to match your plan year. The one place your fiscal year still matters for the plan is contribution deductions — your company generally deducts a contribution for its own tax year, based on when the contribution is made, regardless of what the plan year is.
The plan year is what the plan itself is built around. It sets the period for nondiscrimination testing, top-heavy testing, and the plan’s annual Form 5500 filing. It also affects how the plan tracks the yearly dollar limits that apply to contributions.
No matter what a plan’s plan year is, the IRS deferral limit on an employee’s own salary deferrals (sometimes called the 402(g) limit) always runs on the participant’s tax year — almost always the calendar year. It applies for every participant, in every 401(k) plan, regardless of that plan’s plan year.
That creates a mismatch for a plan using a non-calendar plan year. The deferral limit resets every Jan 1, but the plan’s own testing and reporting period does not, so the plan has to track a calendar-year limit and a non-calendar plan year at the same time.
Gusto Retirement always sets the plan year to the calendar year, Jan through Dec. This keeps deferral limits, testing, and reporting on the same 12-month period, which removes a layer of complexity that a non-calendar plan year adds.
Annual testing, like the ADP and ACP tests for a 401(k) plan and top-heavy testing, uses compensation and deferral data for the plan year. Payroll and W-2 reporting are already organized by calendar year, so a calendar year plan year lets the plan pull that data directly, without splitting or prorating it across two different years.
The IRS also announces the dollar limits that apply to 401(k) plans, like the deferral limit and the compensation limit, for a calendar year at a time. A calendar year plan year applies one set of limits for the whole plan year. A non-calendar plan year can end up straddling two different years’ limits within the same plan year.
Important: If your plan currently runs its plan year on your company’s fiscal year, or on any other non-calendar 12-month period, the plan must move to a calendar year plan year before it converts to Gusto. Gusto does not offer an alternate plan year option.
Changing a plan’s plan year requires a plan amendment. Your prior service provider typically handles this amendment as part of getting the plan ready to convert, since it happens before Gusto’s plan document and recordkeeping take over.
Moving to a calendar year plan year usually creates a short plan year — a plan year of less than 12 months — that bridges the old plan year end date and the new calendar year start date. For example, a plan moving from a Jul 1 to Jun 30 plan year would likely have a six-month short plan year running from Jul 1 to Dec 31, right before its first full calendar year plan year begins on Jan 1.
The short plan year will require its own nondiscrimination testing, top-heavy testing, and Form 5500 filing, the same as any other plan year. Because the short plan year happens before Gusto takes over as the recordkeeper, your prior service provider is generally the one who runs that testing and files that Form 5500, not Gusto.
Note: Some dollar limits will be prorated for a short plan year based on how many months it covers. The elective deferral limit is the exception — since that limit always runs on the calendar year and not the plan year, it is not prorated for the short plan year.
Before your conversion date, confirm with your prior service provider that the plan year amendment is adopted, the short plan year’s testing is complete, and the short plan year’s Form 5500 is filed or on extension. Gusto’s plan document and testing start with your first full calendar year plan year.
If your plan already runs on the calendar year, none of this applies, and your plan year does not change when you convert to Gusto. See how sponsors can prepare for the close of this plan year and start of the new year for what to expect at year-end.
If it does not, plan on coordinating the plan year amendment, the short plan year’s testing, and its Form 5500 with your prior provider before your conversion date, since that work happens outside Gusto.
Check your plan document or talk with your plan’s advisor for how a plan year change would work for your specific plan.
This information is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax, legal and/or financial advice that considers all relevant facts and circumstances. You are advised to consult a qualified financial adviser or tax professional before relying on the information provided herein.