Understanding the Short Plan Year Rule

Employee benefit plans do not always operate on a 12-month cycle. New plans, terminated plans, mergers, or fiscal year changes all can result in a short plan year. In these situations, the Short Plan Year Rule under the Employee Retirement Income Security Act of 1974 (ERISA) can provide meaningful relief by allowing sponsors to defer the independent audit to the following year.

What is a short plan year?

Under Department of Labor 29 Code of Federal Regulations (CFR) Section 2520.104-50, a short plan year is seven months or less. A short year may occur when:

• A plan is established or commences operations
• A plan is merged or consolidated
• A plan is terminated
• The plan’s year-end is changed (for example, from June 30 to Dec. 31)

How does the Short Plan Year Rule work?

The Short Plan Year Rule allows sponsors to defer the audit requirement for the first of the two consecutive plan years when one of the two plan years is a short plan year of seven months or less.

Under this rule, the sponsor may:

• File the Form 5500 “Annual Return/Report of Employee Benefit Plan,” for the deferred year without attaching an independent qualified public accountant (IQPA) report
• File the Form 5500 for the second plan year with a single audit report covering both the short year and the adjacent full plan year

In practical terms, one audit engagement is performed to cover both periods – a short plan year and the related full plan year – and separate financial statements are prepared for each period, with the results presented in a single IQPA report that addresses both plan years.

What are conditions for using the rule?

For the Short Plan Year Rule to apply, the following conditions generally must be met:

• Have a short plan year of seven months or less (either the prior year or the current year)
• Elect to defer the audit for the first of two years in which one is a short year
• Check question 3d(2) on the Form 5500, Schedule H, “Financial Information,” to indicate the IQPA opinion is not attached because it will be attached to the next Form 5500 pursuant to 29 CFR 2520.104-50
• For the first of two years in which one is short, attach to the Form 5500 a statement that:
  • Cites 29 CFR Section 2520.104-50
  • Explains why one of the two plan years is short
  • States that the audit report covering both plan years will be filed with the next year’s Form 5500

The Form 5500 for the second year must include, as attachments, the auditor’s report and financial statements covering both plan years.

A simple example

Consider a calendar year defined contribution plan that:

• Begins operations Aug. 1, 2024, with a plan year ending Dec. 31, 2024 (a five-month year)
• Continues with a full plan year ending Dec. 31, 2025

The sponsor may elect to do both of the following:

• File the 2024 Form 5500 without an audit, attaching the required short-year statement
• File the 2025 Form 5500 with a single IQPA report covering both the five-month 2024 short year and the full 2025 plan year

Important limitations and common pitfalls

When considering the Short Plan Year Rule, sponsors should keep the following in mind.

• Large-plan filing still applies. Large-plan status is determined based on the number of participants at the beginning of the plan year, consistent with Form 5500 instructions. If the plan otherwise meets the definition of a large plan, the following year’s Form 5500 must be filed as a large plan, with an audit report attached, even if participant counts fall below 100 in that year.
• Audits may not be deferred for two consecutive short plan years. The rule is designed for a single short-year transition, not as an ongoing deferral strategy.
• The rule does not waive the audit outright. It simply shifts the timing so the audit covers both years at once.

A misstep such as failing to include the combined audit with the second year’s filing can lead to late-filing issues and potential penalties.

Best practices for plan sponsors

Sponsors anticipating a short plan year should consider these steps:

1. As soon as it is clear there will be a short year (new plan, termination, merger, or year-end change), discuss the implications with the auditor, third-party administrator, and ERISA counsel.
2. Validate that the plan year is seven months or less and that using the Short Plan Year Rule aligns with the long-term reporting and audit strategy.
3. Prepare the required statement to attach to the first-year Form 5500 (the year filed without an IQPA report), explaining the reason for the short plan year and citing 29 CFR Section 2520.104-50.
4. Coordinate timing and scope of the combined audit so that records, service provider reports, and internal documentation are complete for both plan years.
5. Document decisions in plan governance minutes and retain support in case of Department of Labor or IRS inquiries.

Bringing it together

The Short Plan Year Rule can help plan sponsors manage compliance efficiently while maintaining strong oversight. In combination with the 80-120 Participant Rule, used correctly, the rules can have these effects:

• Reduction of unnecessary audit costs
• Mitigation of the impact of participant-count fluctuations and plan year changes
• Compliance with the Form 5500 instructions and ERISA regulations