What is a Short plan year?

A short plan year is a retirement plan year that covers fewer than 12 months, which often occurs when an employer adopts a 401k partway through the calendar year. Even with a short first year, the annual contribution limits still apply in full, so participants can defer up to the full yearly maximum from the paychecks that remain in the year. Employer contributions remain deductible until the tax filing deadline, including extensions, and a retirement plan startup credit can offset much of the first-year setup cost. Starting a plan with a short year supports the Traditional 401k plan strategy.