What's the difference between plan years and calendar years for health benefits?

When you're new to health insurance, all the lingo can sound like a different language. With so many health plans, policies, and dates to keep track of, it’s easy to make inadvertent errors that could cost you.

To avoid mismanaging your employee benefits, you need to understand the differences between plan years and calendar years. Whether you're selecting a new plan or trying to adjust your existing plan coverage, recognizing how these timelines can impact coverage and renewals can help you make smart choices for your organization.

In this article, we’ll help you navigate the complexities of health insurance by explaining how plan years and calendar years impact your benefits coverage.

In this blog post, you'll learn the following:

• The definition of plan year.
• The definition of calendar year
• The pros and cons of plan years and calendar years.

Health benefits for your employees

Health insurance ranks among the most vital benefits that employers can offer their employees. In PeopleKeep's 2024 Employee Benefits Survey, 92% of employees rated health benefits as important.

Health benefits help your employees receive the quality medical care they need. They also protect your employees from unexpected medical expenses. According to the Peterson-KFF Health System Tracker¹, nearly 1 in 12 adults owe medical debt. Offering health coverage can help your employees avoid this financial burden.

When employers offer this popular employee benefit, it shows they're dedicated to the well-being of their team, which can catch the eyes of job seekers. Survey results show that 81% of employees said an employer’s benefits package is an important factor in whether they accept a job.

The most common ways employers provide health benefits are through:

• Group health insurance plans
• Health reimbursement arrangements (HRAs)

Group health insurance is a costly, one-size-fits-all approach to coverage. An HRA is an affordable alternative that considers each employee’s unique needs. With an HRA, employers can reimburse employees for more than 200 types of eligible medical expenses, including their individual health insurance premiums.

What is a plan year for health benefits?

A plan year refers to the 12-month period chosen by an employer to administer their health benefits plan. Under the Employee Retirement Income Security Act of 1974 (ERISA), employers must define a 12-month plan year. However, the plan year might not coincide with a calendar year. It could match up with the fiscal year or any other period of time that works best for an organization.

Aligning the benefits plan with the fiscal year can simplify budgeting, but it may confuse your employees who are used to calendar-year schedules, especially regarding taxes and benefits enrollment.

What is a calendar year for health benefits?

Unlike a plan year, a calendar plan year aligns with the standard calendar year. This straightforward annual period of benefits coverage begins on January 1 and ends on December 31.

The calendar year option is straightforward for employees. It aligns with tax schedules, making it easier to figure out how benefits impact W-2 reporting. But, it might not mesh well with your organization's budgeting cycle, which may lead to some financial challenges.

Plan year vs. calendar year and how each impacts coverage

In health insurance, offering health benefits on a plan year or calendar year basis significantly influences the timelines for what your employees pay for their coverage.

If you offer a group health insurance policy and your carrier allows it, your deductibles and out-of-pocket maximums can follow either a plan year or calendar year, like this:

• Plan year: A plan year deductible and out-of-pocket maximum will reset when your company's plan renews. So, if your health insurance plan starts on February 1, the deductible limit and out-of-pocket maximum would run from February 1 to January 31 of the following year.
• Calendar year: A calendar year deductible and out-of-pocket maximum will reset every January 1. Some insurers require alignment with calendar years, even if you want to offer a non-calendar year plan.

Check your plan documents or reach out to your insurance company to confirm the specific details of your benefit. If they don't allow this flexibility, employee deductibles and out-of-pocket maximums may go off the calendar year even if you choose to offer a health benefit on a plan year.

How this affects HRAs

If you offer a stand-alone HRA to your team, you need to consider their individual insurance plans. Individual plans run on calendar years, so a different HRA plan year would qualify your employees for a special enrollment period (SEP) when you offer the benefit and at the HRA’s renewal. This allows employees to renew or change their coverage outside of Open Enrollment. However, they can usually only choose a plan from the same metal level as the one they had before.

If you use PeopleKeep's HRA administration platform, your HRA will follow the calendar year. This means if you start to offer benefits halfway through the year, your first benefit year is going to be shorter. We also require you to give your employees a minimum of 30 days' notice before your benefit starts.

Plan year vs. calendar year and why it matters for your organization

When considering plan and calendar years, it’s important to understand their potential effects on your organization.

Here are some factors to consider:

• Employee engagement. If you sync up benefits with the calendar year, it’s likely to boost employee satisfaction since it fits right into their budget plans. On the flip side, a plan year that follows the fiscal year could come off as more focused on the company itself. In the eyes of employees, this may give the impression that you prioritize your profits over their well-being, which could negatively impact employee morale.
• Approach to budgeting. While following a calendar year is straightforward, it may present budgeting challenges. For many organizations, aligning their benefits plan with their fiscal year can give them a better grip on their finances and help with planning ahead. It makes budgeting easier since you can look at benefit costs right alongside all the other expenses you have to deal with.
• Management of employee benefits. Calendar years offer simplicity. Having a non-calendar plan year can make things a bit tricky when it comes to benefits administration. Keeping everything in line with the legal requirements set by the IRS and the Affordable Care Act (ACA) can be difficult when you’re not sticking to the usual schedule.

Can plan years change?

While employers can change plan years, it requires careful planning, compliance with regulations, and effective communication with employees.

Employers should notify employees of the change, provide ample time for adjustments to enrollment, and communicate any impact on benefits, coverage, or eligibility that may result from the change.

Other key health insurance terms to know

Understanding plan and calendar years is just the beginning. Once you get the hang of some other basic healthcare terms, such as copayments and coinsurance, picking out a health benefit will feel a lot less stressful.

Conclusion

Business owners, employers, and HR professionals need to understand the difference between calendar year and plan year when it comes to health benefits. A calendar year runs like your regular calendar, while a plan year is based on the schedule that you pick, which might not match up with the calendar. This difference can impact when benefits reset and how your employees handle their healthcare costs.

1. The burden of medical debt in the United States