Your Section 125 plan year decides when employees can start saving on taxes, when they must choose benefits, and when your plan document has to be signed. Many employers pick a date without checking these rules, then find out they cannot go back and fix it. This page shows how to choose a plan year, when a short plan year works, and what it costs to start mid-year.
What is a Section 125 plan year?
A Section 125 plan year is the 12-month period a cafeteria plan uses to run elections and coverage. A cafeteria plan is a written employer plan under Section 125 of the Internal Revenue Code that lets employees pay for qualified benefits before taxes. The plan document must state the plan year. IRS cafeteria plan training lists "the plan year" as a required plan provision.
Most employers use the calendar year. Others match the plan year to the health insurance renewal date, such as July 1 to June 30. Either choice is fine if the plan document says so.
How long must a Section 125 plan year be?
A Section 125 plan year must be 12 consecutive months. The proposed Treasury regulations at Prop. Treas. Reg. 1.125-1(d)(1) say so directly, as quoted by the benefits firm Newfront. A short plan year of less than 12 months is permitted for a valid business purpose under 1.125-1(d)(3).
The most common valid purpose is moving to a new plan year. For example, a plan on an April 1 to March 31 year can switch to the calendar year by running a short plan year from April 1 to December 31. Newfront notes the plan cannot stretch a year past 12 months to make the switch.
When must the Section 125 plan be signed?
The Section 125 plan must be adopted and effective on or before the first day of the plan year. Prop. Treas. Reg. 1.125-1(c)(1) states that rule, according to Newfront. A plan signed late cannot reach back to cover earlier months.
This matters because of the tax result. Newfront cites court decisions where employee contributions made before the plan document was adopted were treated as taxable wages. The employer then owed payroll taxes on them. Amendments follow the same rule and cannot take effect retroactively. Our plan document and SPD guide lists what the document must contain.
When do employees have to make their elections?
Employees must choose their benefits before the plan year begins. IRS cafeteria plan training says participants "must elect the amounts and types of benefits to be received prior to the beginning of the plan year." Once coverage starts, the plan generally may not let an employee revoke an election, except for listed events such as a change in status.
New employees get a break. The IRS training says the 12-month rule "does not prohibit new employees from electing benefits for a part of the cafeteria plan year." A person hired in August can elect for the months that remain. See the Section 125 re-enrollment guide for how yearly elections roll over.
How do you choose the best Section 125 plan year?
Choose the plan year that matches your health insurance renewal date or your payroll calendar, then keep it steady. Use this simple test.
- Calendar year (January 1 to December 31). Best when payroll, W-2s, and the FSA limits all follow the calendar. It is the easiest to explain to staff.
- Renewal-aligned year. Best when your group health plan renews on a fixed date such as July 1. Employees choose benefits once, at the same time as their health plan.
- Fiscal year. Works for nonprofits and schools whose budgets follow a fiscal calendar.
Pick the date at least 60 days before it starts. That gives time to sign the plan document, notify staff, and collect elections. Our open enrollment guide for employers covers the notice step.
Can you start a Section 125 plan in the middle of the year?
Yes. An employer can adopt a new Section 125 plan at any point in the year, as long as the plan starts on a date still ahead. The first plan year can be a short year that runs from the start date to the end of that calendar year. Elections are made before that start date, and savings begin with the first pre-tax payroll after it.
You cannot go backward. A plan that starts October 1 saves nothing on January to September wages. The only cost of waiting is the months you miss.
Table: Employer FICA savings by start date (10 enrolled employees, $250 monthly election, hypothetical)
| Plan start date | Months of savings this year | Employer FICA saved this year |
|---|---|---|
| January 1 | 12 | $2,295 |
| July 1 | 6 | $1,147.50 |
| October 1 | 3 | $573.75 |
Employer FICA is 7.65%, made of 6.2% for Social Security and 1.45% for Medicare, according to IRS Tax Topic 751. The table multiplies enrolled employees, the monthly election, the months left, and 7.65%. Our FICA savings guide shows the full formula.
What changes with a short plan year?
A short plan year shortens the election period and the health FSA limit, but not the rules. Newfront reports that IRS guidance requires the health FSA limit to be prorated for a short plan year. Its example prorates a nine-month year to nine-twelfths of the annual limit.
The IRS training also says the period of coverage for a health FSA is 12 months or the entire short plan year. Employees also cannot be locked into an irrevocable election longer than 12 months. When an insurance policy runs past a short plan year, many employers use a passive open enrollment so staff keep current elections unless they opt out. Our FSA carryover and grace period guide explains how unused FSA money is treated at year end.
Who handles the plan year work for employers?
A Section 125 administrator handles the plan document, the election window, and the testing that keep a plan year valid. That work includes dates, notices, and the paperwork that must be in place before day one. Employers who do it alone often miss the adoption deadline or send late notices.
Summit Health Benefits provides a written plan document, a summary plan description, and nondiscrimination testing support, with documents reviewed by ERISA attorneys. Summit Health Benefits charges $35 per enrolled employee per month, paid from the FICA savings the plan creates. The employer still nets about $56 to $101 per enrolled employee per month. Use the Summit savings calculator to model your numbers, or read the Section 125 setup guide for the steps. The implementation timeline shows how long each step takes.
Schedule a Plan Year Review With Our Benefits Experts
A Summit Health Benefits advisor helps you pick a start date, confirm your plan document is ready in time, and estimate what you save from day one.
Frequently Asked Questions
Does a Section 125 plan have to follow the calendar year?
Can a Section 125 plan start in the middle of the year?
Can a Section 125 plan be backdated?
What is a short plan year for a cafeteria plan?
Can new hires join a Section 125 plan after the plan year starts?
Can employees change their Section 125 elections during the plan year?
How much does starting a Section 125 plan late cost an employer?
Sources: IRS, Cafeteria Plans training, Lesson 4 (irs.gov); IRS Tax Topic 751, Social Security and Medicare Withholding Rates (reviewed September 2026); IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits (2026); Newfront, Short Plan Year Considerations; Newfront, Section 125 Cafeteria Plan Document Effective Date; Prop. Treas. Reg. 1.125-1 as cited by Newfront.