In the past, your employer was not able to replace your SIMPLE IRA with a safe harbor plan during the year; however, new IRS changes will allow that to happen in 2024.
So, what does this mean? Basically, due to the SECURE 2.0 Act, that are taking effect this year, employers can now choose to replace a SIMPLE IRA plan with a safe harbor 401(k) plan anytime during the year – if they meet certain criteria. Also, the two-year rollover limitation in SIMPLE IRAs converting to 401(k) or 403(b) plan will be waived.
In the past, employers were not permitted to maintain another retirement plan where employees could accrue benefits. This was known as the exclusive plan rule. This rule was limiting employers’ flexibility in transitioning to other qualified plans during a calendar year.
But for plan years that begin after Dec. 31, 2023, employers can terminate a SIMPLE IRA plan any time and replace it with a safe harbor plan – creating an exception to the rule.
The effective date of the safe harbor plan must be the day after the termination date.
To do this, your employer must take formal written action and notify employees 30 days before the termination date. Also, employers must:
- Specify that no salary reduction contributions will be permitted on compensation paid after the termination date.
- Include a statement that matching or nonelective contributions will be made based on compensation through the termination date.
- The employer is not required to notify the IRS of the SIMPLE IRA plan termination, but should notify the financial institution and payroll provider that contributions will cease.
- Keep records of the steps taken during the termination process.
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