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Short plan years


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Kind of an offshoot of an earlier question. Governmental non-ERISA plan (public school). Health FSA.

Suppose you have a current plan year of 7/1 to 6/30. However, due to union contract negotiations, and some legal changes at the state level mandating certain changes, there is a one-time "disconnect" with making elections, and what is really needed is an election from 1/1/18 to 6/30/18, then getting back to an annual election from 7/1/18 to 6/30/19. Of course, they already have an annual election in place for 7/1/17 to 6/30/18.

Now, this leaves you with (at least) two major choices. First, you can consider the union contract change as an allowable "change in status." I think this is a stretch, but one might argue that the new union contract represents a "commencement of employment." I don't buy it as a valid argument, but looking for any approach that might work.

Second, and I think this is more valid, the plan could be amended to change the plan year to run a short plan year from 1/1/2018 to 6/30/2018. Then amend it back to a full year effective 7/1/2018. This would create two consecutive short plan years - one in 2017 and one in 2018. While I have heard that you can't have two consecutive short plan years, I haven't found any official support for that position. What I do find, in the proposed regulations under 1.125-1, is that a short plan year is permitted for "a valid business purpose."

It seems to me that this combination of circumstances would certainly constitute valid businesses purposes, as the purpose is most definitely not to "circumvent the rules of Section 125 or these regulations." So this is the approach that I would say is reasonable, and SHOULD be defensible.

I'd appreciate any and all thoughts. Any special holes/pitfalls I'm failing to consider? Etc.? Thanks.

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