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 2.0 Act 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 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) |
|
| Safe Harbor 401(k) |
|
| QACA 401(k) |
|
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.
Any information provided is for informational purposes only. It cannot be used for the purpose of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation.
©2024, Retirement Learning Center, LLC. Used with permission.
