Making Mid-Year Moves: Transitioning from SIMPLE to Safe Harbor 401(k) Plans

In the world of retirement savings plans, businesses often find themselves evaluating their options to better suit the needs of their employees and their company’s growth. One common transition many businesses consider is moving from a SIMPLE IRA plan to a Safe Harbor 401(k) plan – and now they can do so mid-year!

Thanks to SECURE 2.0 we are now able to convert a SIMPLE to a Safe Harbor 401(k) Plan mid-year. While both plans offer retirement benefits, there are distinct differences that may make a Safe Harbor plan a more attractive option for some business owners.

Before delving into why a business owner may want to transition from a SIMPLE plan to a Safe Harbor Plan 401(k) Plan, let’s first understand some regulations behind making the change mid-year:

• The replacement plan can be either a traditional Safe Harbor plan or a Qualified Automatic Contribution Arrangement (QACA) Safe Harbor 401(k) plan. The replacement Safe Harbor/QACA 401(k) plans must be effective as of the termination date of the SIMPLE IRA.

• Contributions will be restricted to an aggregate elective deferral limit (including catch-up contributions) during the replacement year. The limit is based on the number of days covered in each plan.
  • Formula: take the number of days covered in the SIMPLE IRA multiplied by the contribution limit ($16,000 for 2024) and add the number of days covered in the 401(k)-plan multiplied by its contribution limit ($23,000 for 2024) for a total deferral contribution.

• Rollovers between the SIMPLE IRA to the new 401(k) plan are allowed, without penalty, if the rolled amount is subject to 401(k) distribution restrictions (e.g., age 59 ½, death, severance of employment, hardship, etc.).