CASE OF THE WEEK – A SIMPLE Switch

By Jenny Kiffmeyer, J.D – The Retirement Learning Center

A SIMPLE Switch

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk 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, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Texas is representative of a common inquiry related to SECURE Act 2.0 of 2022 (SECURE 2.0). My client wants to terminate its SIMPLE IRA plan during 2024 and start a safe harbor 401(k) plan as allowed by SECURE 2.0. What types of safe harbor plans qualify as a replacement plan for this purpose?”

Highlights of the Discussion

For the 2024 plan year and later plan years, employers may replace their SIMPLE IRA plans mid-year with what we will call an “eligible 401(k) replacement plan.” An eligible 401(k) replacement plan, for this purpose, is a

  • 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)].

Note that the text of SECURE 2.0 also lists a new Starter 401(k) plan [IRC Sec. 401(k)(16)] as an acceptable replacement plan. However, that appears to be a mistake. The General Explanation by the Joint Committee on Taxation indicates Congress’s intent was not to include the Starter 401(k). This is supported by draft technical corrections to SECURE Act 2.0, which strikes the reference to IRC Sec. 401(k)(16) (i.e., a Starter 401(k) plan).

The annual deferral limits are different for the SIMPLE IRA plan and the replacement plan. Therefore, under the new rules, the participant’s annual deferral limit will be prorated (by day) between the SIMPLE IRA plan and the eligible 401(k) replacement plan for the year (IRS Notice 2024-02, Q&A G-6).

Eligible 401(k) Replacement Plan Key Characteristics
A SIMPLE 401(k)
  • Employer has 100 or fewer employees
  • Must be the only plan maintained by the employer
  • Must file a Form 5500 annually
  • Voluntary employee deferrals
  • Mandatory employer contributions (generally, 3% match or 2% nonelective)
  • Immediate vesting for contribution types
  • Additional information at IRS SIMPLE 401k facts
Safe Harbor 401(k)
  • No limit on number of employees
  • Voluntary employee deferrals
  • Mandatory employer contributions—3 options
    • Basic match: 100% percent match on deferrals up to 3% of compensation and a 50% match on deferrals between 3% and 5%
    • Enhanced match: At least equal to the aggregate match under the basic match formula (e.g., 100% match on deferrals of 4% compensation) or
    • A 3% nonelective contribution
  • Immediate vesting for all contribution types
  • Standard Form 5500 filing rules apply
  • Additional information at IRS Safe Harbor 401(k) Plans
QACA 401(k)
  • No limit on number of employees
  • Automatic enrollment of at least 3% with automatic escalation of at least 1% annually after the initial period, to at least 6% up to a maximum of 15%
  • Mandatory employer contributions—2 options
    • Matching contribution: 100% match on deferrals up to 1% of compensation and a 50% match on deferrals between 1% to 6% of compensation; or
    • A 3% nonelective contribution
  • Two-year vesting schedule could apply to employer contributions
  • Standard Form 5500 filing rules apply
  • Additional information IRS QACA facts

When using either a standard safe harbor 401(k) plan or a QACA safe harbor plan as a replacement plan for the SIMPLE IRA plan, an employer would not be precluded from establishing another plan (e.g., a cash balance plan) to further maximize contributions.

Conclusion

SECURE 2.0 provides relief for 2024 and later years for businesses that want to switch mid-year from a SIMPLE IRA plan to an acceptable safe harbor 401(k) replacement plan. Notice 2024-02 gives more clarity to this option.

Pattern

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