Question of the Month: What is the Difference between a Plan Year and Policy/Contract Year?

Question: What is the difference between a plan year and a contract/policy year, and does it matter? 


Often the terms “plan year,” “contract/policy year” are used interchangeably and usually, this is not an issue, When the plan year and contract or policy years coincide there is really no practical distinction. However, if these periods are different, or if it is unclear, the plan year must be determined for regulatory and compliance reasons as well as for plan design issues. 

First, what is the difference between a plan year and a contract (or policy) year? 

The Employee Retirement Income Security Act (ERISA) defines the plan year as “the calendar, policy, or fiscal year on which the records of the plan are kept.” Even if an employer is not subject to ERISA, the concept of maintaining records that pertain to a specific period of coverage are the same.  

Separately, a contract or policy year is the period for which the contract terms applicable to the benefits being provided are established, including the period for which deductibles and other cost-sharing requirements will apply towards the cost of the plan. The contract/policy year is established as part of the contracting process with a carrier or stop-loss vendor. 

How is the plan year determined? 

Ideally, the plan year is designated in the controlling documents, and for employers subject to Form 5500 filing requirements, it is included on the latest Form 5500. It is not always this straight-forward, but there is a general hierarchy within the Health Insurance Portability and Accountability Act (HIPAA)regulations (§ 144.103 Definitions) that provides the following guidance for determining the formal plan year. If the plan documents or Form 5500 do not indicate the plan year (or the employer is not subject to Form 5500 filing requirements), then the general rule is: 

Plan year means the year that is designated as the plan year in the plan document of a group health plan, except that if the plan document does not designate a plan year or if there is no plan document, the plan year is –  

(1) The deductible or limit year used under the plan;

(2) If the plan does not impose deductibles or limits on a yearly basis, then the plan year is the policy year;

(3) If the plan does not impose deductibles or limits on a yearly basis, and either the plan is not insured or the insurance policy is not renewed on an annual basis, then the plan year is the employer’s taxable year; or 

(4) In any other case, the plan year is the calendar year.  

Why does the plan year or contract/policy year matter? 

There are both regulatory and plan design reasons that make the plan year so important. Here are some examples:

  • 5500s 

An employer subject to Form 5500 reporting requirements must file the form based on the benefit plan year. If the employer’s plan year is on a calendar year basis but an insurance contract is on a non-calendar year basis, the employer is required to report on the plan year. 

  • PCORI Fee 

The PCORI fee is based on the last day of the contract/policy year for insured plans and the last day of the plan year for self-insured plans. 

  • Deductibles/Cost-Sharing 

How deductibles and cost-sharing are administered for insured plans may be based on the insurance contact or policy year, or these documents may be aligned with the employer’s plan year. The number of covered visits (e.g., annual physical) may be based on the contract/policy year. Knowing the difference is crucial for communicating the cost-sharing requirements and benefits to participants. 

In summary, knowing the plan year may be as simple as having the plan and all contracts or polices run on a calendar year basis (or other aligned basis). However, if the plan year and contract/policy years are not aligned, the plan sponsor must know the difference to ensure not only regulatory compliance, but that participants are receiving the proper plan design communications as well.