Posted by Cindy Turner in Plan Design and Administration, Employee Benefit Plans.
By Cindy Kochersperger, CPA, QKA
Yes you can! Another welcomed changed with SECURE 2.0 is the ability of an employer to switch from offering a SIMPLE plan to a 401(k) Plan. This was effective January 1, 2024. Prior to SECURE 2.0 you could only switch the type of plan offered at the beginning of the calendar year.
There are several reasons to replace a SIMPLE plan with a 401(k) Plan; greater deferral limits, a vesting schedule for discretionary employer contributions, and plan design flexibility.
For 2024, the deferral limit in a SIMPLE plan is $15,500 ($19,000 if catch-up eligible). The deferral limit in a 401(k) plan is $23,000 ($30,500 if catch-up eligible).
Employer contributions in a SIMPLE plan are immediately 100% vested. In a 401(k) plan, discretionary employer contributions can be subject to a maximum of a 6-year graded vesting schedule.
A 401(k) Plan also offers greater flexibility with plan design, not only with contributions but withdrawal provisions as well. While SIMPLE plans now allow for a modest nonelective employer contributions applied consistently to all eligible participants, 401(k) Plans allow for more flexible methods of allocating a nonelective employer contribution. In a SIMPLE plan, participants have immediate access to their account whereas in a 401(k) Plan there are distribution restrictions. Furthermore, participant loans are available in a 401(k) Plan, not in a SIMPLE Plan.
While the mid-year switch is permitted, there are some rules to be followed to effectuate this change. The SIMPLE plan has to be replaced by a safe harbor 401(k) Plan. This can be either a safe harbor matching plan or a safe harbor non-elective plan. The replacement also has to be done by October 1st. Instead of a 60 day advance notice informing participants the SIMPLE plan is being suspended, the notice requirement is shortened to 30 days.
Something to note is the requirement that the funds in the SIMPLE plan be held for at least two years to avoid a penalty is waived if the SIMPLE plan balance is rolled into the 401(k) Plan.
The deferral contribution limits are also prorated. The limits are based on the number of days each plan is in effect divided by 365.
If you are considering switching from a SIMPLE plan to a 401(k) plan, it’s not too late to start the conversation for a switch for 2024.
Be sure to consult with your financial or tax advisor on this topic as individual situations may vary. The information contained in this article or webinar, and any related materials, are for informational purposes only, and cannot be relied upon for legal, financial, tax, accounting, or other professional services advice. The content is provided on an “as is” basis and PBMares makes no representations or warranties about the accuracy or sustainability of any information for your purposes. For any specific questions you may have, please contact us.
This content is accurate at the time of publication. Always ensure you are reviewing the most recent information available. Contact your tax or financial advisor if you need clarification.
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About the Author
Cindy Turner
CPA, QKA
Partner, Retirement Plan Services
Norfolk
Cindy specializes in 401(k) and profit-sharing plans for businesses of all sizes, creating plan designs and providing on-going assistance with plan administration.
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