Exception to “one SIMPLE per year” rule?
Vanguard recently announced that it will no longer be offering SIMPLE IRA plans, and that, instead, it is transitioning all of that business to Ascensus (a separate entity with whom Vanguard has partnered for years). In its notice, it made clear that distributions from a SIMPLE prior to ______ date would be reported on a Vanguard 1099 and distributions after that same date would be reported on an Ascensus 1099. The notice goes on to say that on a specific date, all Vanguard SIMPLE participants would be rolled into the Ascensus plan unless the plan admin opts out. All of the important dates are in July (more specifically, not Jan 1).
questions:
- How is it not a violation of the “one plan per year rule”, if a plan gets rolled to Ascensus? Vanguard and Ascensus are not merging. They are independent companies with their own tax ID and reporting. They both still engage in business that is not coupled to the other.
- Vanguard has given employers the chance to “opt out” of this auto-rollover that is supposed to occur in July. But what are their options, really? Rolling to a plan somewhere else also seems to violate the once per year rule. And the IRS does not permit mid-year plan terminations AND any termination (even end of year) requires a no-less-than 60 day written notice to employees.
In short, I don’t see how every single potential path that Vanguard has presented isn’t a violation of IRC in some form or fashion. Is there an exception to these rules of which I’m not aware? Thanks,
Permalink Submitted by Alan - IRA critic on Thu, 2024-06-20 14:51
VG intends to directly transfer such plans to Ascensus despite incorrectly using the term “rollover”. Direct transfers are unlimited in number and not reported on a 1099R. In this situation, the SIMPLE IRA owner will not need to individually arrange for the transfers and the plans will just continue at Ascensus. Of course, if the SIMPLE owner actually requests a distribution, they will get a 1099R and will have to use a rollover if they wish to continue the plan and have met the 2 year waiting period.
If a SIMPLE IRA owner does not want Ascensus as their IRA custodian and they opt out by the deadline, they need to know the implications of their decision. Many other SIMPLE IRA custodians may not accept a mid year transfer or a 60 day rollover. Of course, if the SIMPLE IRA is no longer active, it could just be transferred to a VG TIRA account.
For active SIMPLE IRAs in which the participant has not met the 2 year waiting period, it should be noted that any distribution is NOT eligible for a 60 day rollover at all, and the distribution would be taxable plus a 25% early distribution penalty.
It is reported that Ascensus fees may be higher than Vanguards.
Permalink Submitted by Nathan Kastner on Thu, 2024-06-20 15:22
Thanks Alan. My larger concern is that the transfer to Ascensus, regardless of what they call it, is not legal. Once the transfer happens, the employer will have had, during 2024, a SIMPLE plan with both Vanguard and Ascensus. That’s two plans in one calendar year – a clear violation of Internal Revenue Code.
Btw… I spoke with a couple other investment custodians that were immediately familiar with the notice Vanguard has sent out and both stated that their official stance was that Vanguard’s recent statement ran afoul of the IRC. One, in particular, stated they would only accept a mid-year plan if the employer provided a written disclosure that they had consulted with competent legal and tax counsel prior to requesting that the plan be transferred.
I was hoping their was some known loophole to the “one plan per year” rule in instances when the custodian was resigning. But alas, I have found nothing. Thanks again,
Permalink Submitted by Alan - IRA critic on Fri, 2024-06-21 17:09
There probably is an exception for custodian resignation, but it’s not in Notice 98-4. With the 10s of thousands of affected clients, VG likely specifically verified this with the IRS given costs of making an error. But that said, if custodians other than Ascensus will not accept mid year transfers, VG clients will likely have to stay with Ascensus through year end.