Terminating a 401(k) mid-year and starting a Simple IRA in the same year

Submitted by MICHELE MEDUGNO on Fri, 2023-05-19 23:44

Looking for a clear cut answer on this situation:

The employer has a 401(k) to which only employee contributions have ever been made.
They want to discontinue the 401(k) and start a SIMPLE IRA instead.
They have low participation in the 401(k) and are looking to establish the SIMPLE as a way to reduce costs.
Because they have such low participation, the SIMPLE required match will be much less costly for them than paying the annual 401(K) admin fees.

I’ve seen answers indicating that they must terminate the 401(k) this year (2023) and wait until Jan 1, 2024 to start the Simple IRA. I have also seen answers indicating that they are okay to terminate the 401(k), give employees 60 days notice that they are establishing a SIMPLE IRA before establishing the SIMPLE IRA in the same year.

Does the fact that there are no employer contributions in the plan make a difference?

Thanks in advance for any clarification.



Submitted by William Tuttle on Sat, 2023-05-20 16:26

There are two reasons why the employer can’t do what they want.

  1. If it is a safe harbor 401k, it canot not generally be terminated mid-year.
  2. A SIMPLE IRA currently* must be the only employer retirement plan in a given calendar year.

*A SECURE Act 2.0 change effective 1/1/24, permits an eligible employer to terminate a SIMPLE IRA plan mid-year if the employer replaces the SIMPLE IRA plan with a SIMPLE 401(k) plan, a safe harbor 401(k) plan, a 401(k) plan with a qualified automatic contribution arrangement, or a “starter” 401(k) plan. Note: The reverse 401k -> SIMPLE IRA will still not be permited.

Submitted by MICHELE MEDUGNO on Wed, 2023-05-24 22:32

Thanks so much for your help on this.  However, the 401(k) plan is definitely not a Safe harbor 401(k).  Employer contributions are discretionary and the employer has not contributed to the plan at all. They do not intend to contribute to it either.  

Submitted by William Tuttle on Thu, 2023-05-25 00:28

  1. Item 1 above was a conditional statement.
  2. Item 2. above applies on its own. A SIMPLE IRA can not be adopted in a year another employer retirement plan has been maintained.
  3. Whether or not there are employer contributions is not relevant to a 401k being maintained for the year.
  4. Bottom line in these circumstances. A SIMPLE IRA can not be adopted to be effective before 1/1/24.
  5. To be effective by 1/1/24, a 2024 SIMPLE IRA notice/enrollment package must be received by the employees no later that 11/2/23.
  6. The client should start before 10/1/23 and not wait until the last minute.

Submitted by MICHELE MEDUGNO on Thu, 2023-06-01 01:21

Really appreciate your help!

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