Mid-Year Change from a SIMPLE IRA Plan to a Safe Harbor 401(k) Plan

Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, Social Security and Medicare. This is where we highlight the most relevant topics affecting your business. A recent call with a financial advisor in New York is representative of a common question on terminating SIMPLE IRA plans.

"A recordkeeper is telling me the deadline for switching from a SIMPLE IRA plan to a safe harbor 401(k) plan mid-year is October 1, but I can’t find anything that states that. Must we implement a safe harbor 401(k) by October 1 when changing from a SIMPLE IRA to a safe harbor 401(k) mid-year?"

Highlights of the Discussion

The recordkeeper may be overlooking the new rules under SECURE Act 2.0 that allow a mid-year termination of a SIMPLE IRA plan if there is an eligible replacement plan. Prior to the passage of SECURE Act 2.0, a plan sponsor could only terminate a SIMPLE IRA plan on December 31, and participants had to be provided with notice of the termination date at least 60 days prior (i.e., November 2). With the passage of SECURE Act 2.0, sponsors may now terminate SIMPLE IRA plans mid-year as long as:

• Notice is provided at least 30 days in advance of the termination date of the SIMPLE IRA plan (see Notice 2024-2, Q&A G3 );

• No salary deferrals are made to the SIMPLE IRAs with respect to compensation paid after the termination date; however, employer matching contributions attributable to salary deferrals or nonelective contributions based on the employees’ compensation earned through the termination date must be made (see Q&A G3);

• The safe harbor plan (1) is established to be effective the day after the SIMPLE IRA is terminated;

• The normal restrictions on SIMPLE IRA rollovers held less than two years are waived in the case of a mid-year change to a safe harbor 401(k) plan (see Q&A G4).

• A safe harbor notice for the replacement safe harbor 401(k) plan is provided to participants with information on the applicable weighted limits (see Q&A G7)

Conclusion

Based on the most recent guidance in Notice 2024-2, there is no day specified as the deadline for establishing a safe harbor 401(k) plan that is replacing a SIMPLE IRA plan mid-year. (Note: October 1 is the deadline under normal circumstances for establishing a new safe harbor 401(k) plan for a year, but that deadline does not apply to mid-year changes from a SIMPLE IRA plan to a safe harbor 401(k) plan.)

As long as there is time to provide a notice 30 days prior to the termination of the SIMPLE IRA plan and there are still days left in the calendar year that the safe harbor 401(k) plan can be effective, it is possible to satisfy the requirements for a mid-year change from a SIMPLE IRA plan to a safe harbor 401(k) plan, although, admittedly, the fewer the days the safe harbor 401(k) plan is effective, the less ability there is to leverage the higher deferral limits in the safe harbor 401(k) plan due to the weighting of that limit.

(1) SIMPLE 401(k) [IRC Sec. 401(k)(11)], Safe Harbor 401(k) [IRC Sec. 401(k)(12) or 401(k) with a qualified automatic contribution arrangement (QACA) [IRC Sec. 401(k)(13)]