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Welcome to the Retirement Learning Center’s (RLC) 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 Arizona is representative of a common question on cash balance plans.
Notice 2024-02 clarified that a SIMPLE IRA plan can be terminated mid-year if the plan sponsor establishes and maintains a Safe Harbor 401(k) as a replacement plan. The employer would also still be obligated to make any employer contributions through the date of termination. This is the only exception to the IRS rule that prohibits plan sponsors from maintaining both a SIMPLE IRA plan and another plan, contract, pension or trust in the same calendar year.
Because the exception only applies to installing a Safe Harbor 401(k) plan (1), a plan sponsor could not also implement a cash balance plan in the same termination year of the SIMPLE IRA plan because of the exclusive plan rule. Adding a cash balance plan in a subsequent year, however, would be possible.
Conclusion
A plan sponsor can terminate a SIMPLE IRA plan mid-year if replacing it with a Safe Harbor 401(k) plan, but it would be prohibited from installing a cash balance plan until the next plan year. If you are interested in discussing cash balance plan suitability, consultants at October Three can support your needs.
(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)]