Short Plan Year & Grace Period

[Guest Grumpy456]

A client sponsors a cafeteria plan. The client uses a fiscal year ending 6/30. The cafeteria plan uses a PYE 12/31. The client wants to change the cafeteria plan's PY to mirror its fiscal year.

Assuming the client wants to implement this change effective July 1, 2007 so that there will be a short plan year from January 1, 2007 through June 30, 2007, can the client amend the cafeteria plan to add a 2-1/2 month grace period?

Since participants in the cafeteria plan have already made elections expecting them to apply for the entire year, we want to provide participants with the longest period of time to "use up" their unused benefits. By extending the effective "year" from 6 months to 8-1/2 months, we've come reasonably close to the full 12 month period.

[J Simmons]

...to provide participants with the longest period of time to "use up" their unused benefits.

I'd suggest you give 'em 6 months not just 2 1/2--allow the current PY to run til 12/31/07, and have your short, accommodating plan year be 1/1/08-6/30/2008.

[LRDG]

Unless there is some overridding, essential bussiness need to implement the fiscal plan year sooner, I'd suggest doing exactly the same, short plan year 1/1/08 thru 06/30/08.

If there is an unavoidable reason for the 07/01/07 PY date, consider conducting a survey of those EE who might forfeite funds. Confidence in the plan is at risk, possibly for a very long time to come. If forfeitures are involved as a result of the short plan year it's possible the plan may never recover former participation levels, and potential consequences on other benefit plans. Based on experience, scorned employees can be brutal.