Fiscal Year Defined Benefit Plans: How Do They Work and What is the Process

The vast majority of business owners are taxed based on a calendar year. This makes sense for simplicity.

However, some companies are taxed on a fiscal year. In theory, it doesn’t matter what the company’s tax year is. But you must ensure the filing and funding dates are followed because they differ from the norm.

This post will discuss companies with fiscal years and how to deal with retirement plan fiscal years. Let’s jump in.

What is a fiscal year?

A fiscal year is a one-year period that companies can use for financial reporting and tax filings. Unlike the calendar year, which runs from January 1st to December 31st, a fiscal year can start and end at any point during the year, depending on the company’s needs.

For example, a fiscal year might run from July 1st to June 30th, October 1st to September 30th, or any other 12-month period. Different countries and regions may have specific regulations and norms regarding fiscal years for both public and private entities.

Why would a company select a fiscal year?

It is very common for large publicly traded companies to be taxed on a fiscal year. Many government entities have a year-end that ends on June 30th, and many retail companies have a year-end of January 31st as it is just after the holiday season. So, there are a variety of industry norms where fiscal years are selected to allow comparability to other entities.

But most small business owners will go with a calendar year. This is the most straightforward approach.

You might want to select a fiscal year for the following reasons:

• Most business owners are calendar year, so CPAs are buried in work at the standard filing deadlines. They occasionally offer discounts to business owners whose year-end coincides with the slow time of year.
• Because of the company’s industry, a fiscal year may coincide with industry standards or seasonality that impacts the business. In addition, you might find that calendar year funding deadlines or tax deadlines fall around certain busy times for the business owner. As such, they may select a fiscal deadline so that the financial responsibilities occur in a timeframe that works better for their schedule.
• There are specific tax planning initiatives that you can undertake when you have a calendar year company that is affiliated with other entities that are on a fiscal year. This strategic approach allows for income splitting between the two entities that will have different year-ends, effectively extending out some of the tax liabilities. In some situations, there can be a significant tax planning advantage for having a fiscal year.
• For tax purposes, organizations may use a fiscal year if it better reflects their income cycle. However, they must get approval from tax authorities like the IRS in the U.S. to do so.

What business entities can have a fiscal year?

While partnerships and S-corporations can have fiscal years, there are some hoops they need to jump through in order to select a fiscal year. As a result, we almost never see it. Most CPAs are uncomfortable with filing these plans other than a calendar year, so it doesn’t make much sense. But we do see them from time to time.

Most fiscal year clients will be C-corporations. C-corporations are self-contained entities that pay their own taxes. Because their taxes are not tied to the owners, it’s easy for them to select different years, and it will not affect any pass-through taxation. This flexibility in fiscal year selection provides a reassuring level of adaptability in your tax planning strategies.

In fact, corporations with fiscal years can be tied together with calendar-year businesses, which can provide some income splitting and allow for different tax structures. While most corporations for small businesses are still taxed on a calendar year, fiscal-year plans are rising in popularity because of tax planning.

Does a retirement plan year have to coincide with a company’s fiscal year?

If your business is taxed on a fiscal year, does your retirement plan need to be set up on that fiscal year? This question gets asked a lot. The answer is not necessarily.

You can have a plan year that differs from a company’s fiscal year. But we generally don’t recommend it. The reason is the client often needs clarification as to the reporting period.

As your retirement administrator, we’re not concerned with your company’s fiscal year. All we care about is the retirement plan here. But when we asked for information like account balances, W-2, and other compensation and compensation, we have the client often give us amounts that don’t coincide if they’re playing here.

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As you are aware, these plans are very complex, and having differing years adds a lot more complexity and confusion. You need to make sure that you stay on top of your financials and provide us with the information that ties to the plan year.

For the above reasons, we always recommend that the plan year be the same as the company’s fiscal year. This is the simplest approach for everybody, even though the filing deadlines can be more challenging to follow.