Written By Jenny Kiffmeyer, J.D – The Retirement Learning Center
“If a client terminates their SIMPLE IRA Plan mid-year and starts a safe harbor 401(k) plan, how are funds that are rolled into the 401(k) plan treated if the participant has not participated in the SIMPLE IRA plan for two years?”
Highlights of the discussion
Generally, any withdrawal from a SIMPLE IRA within two years of the individual’s initial participation in the SIMPLE IRA plan is subject to a 25% early distribution penalty. Further, the amount is not eligible for rollover to a non-SIMPLE IRA during the two-year waiting period. However, Section 332 of SECURE Act 2.0 (S 2.0) modified this rule for an employer that replaces its SIMPLE IRA plan mid-year with a safe harbor 401(k).[1] In that specific scenario, the SIMPLE IRA owner can roll over the account to the newly established safe harbor 401(k) without triggering the early distribution penalty, regardless of the two-year waiting period. Distribution restrictions in the new plan apply to the rollover, however.
In some plans, depending on the language in the plan document, assets rolled into a 401(k) plan may be distributed at any time. However, Section 332(b) of S 2.0 requires that amounts rolled into a 401(k) or 403(b) plan from a terminating SIMPLE IRA plan within the first two years of participation must be subject to the distribution limitations that apply to elective deferrals outlined in IRC §401(k)(2)(B) or 403(b)(11) (see Notice 2024-2, Q&A G-4). Specifically, these rules provide that the amount rolled over can only be distributed, as long as permitted by the plan document, for the following purposes:
- Age 59 ½;
- Hardships;
- A qualified reservist distribution;
- Severance from employment;
- Death;
- Disability;
- Plan termination;
- For certain lifetime income investments; and
- As qualified long-term care distributions.
The plan would have to separately account for the SIMPLE IRA rollover to ensure compliance with the restrictions.
Conclusion
It is important for plan sponsors who are terminating their SIMPLE IRA plan mid-year and starting a new safe harbor plan to make sure that any rollovers from the SIMPLE IRA are being treated, for distribution purposes, the same as elective deferrals.
