What you need to know about ending a SIMPLE IRA plan midyear

by | May 5, 2026 | Uncategorized

SIMPLE IRA

Here’s a question that comes up more often than you might think: What happens if a client ends their SIMPLE IRA midyear and switches to a Safe Harbor 401(k)?

And – as an aside – what happens if the employee hasn’t had the SIMPLE IRA for two full years when this happens?

We’re going to break it down for you.

Normally, a SIMPLE IRA comes with a fairly strict catch: If you take money out within the first two years of participating, you’re hit with a 25% early withdrawal penalty. No one wants that, right?

And, on top of that, you typically can’t roll that money into a non-SIMPLE IRA during that two-year window.

However, there are exceptions, thanks to the SECURE Act 2.0. Under SECURE Act 2.0, there’s now an exception if an employer replaces a SIMPLE IRA with a safe harbor 401(k) mid-year.

In this specific situation, employees can roll their SIMPLE IRA funds into the new 401(k) without triggering that 25% penalty—even if they haven’t hit the two-year mark yet.

We wouldn’t quite call it a catch, but there are some rules. Even though the rollover is allowed, the money doesn’t suddenly become fully flexible.

The rolled-over funds must follow the same withdrawal rules as 401(k) elective deferrals. That means the money is generally locked up unless one of these situations applies:

  • You reach age 59½
  • You qualify for a hardship withdrawal
  • You leave your job
  • You become disabled
  • The plan is terminated
  • Or in certain other limited situations (like death or specific long-term care distributions)

So, while the rollover avoids the penalty, it doesn’t mean immediate access to the funds.

And there is one more detail to consider.

The 401(k) plan needs to keep track of these rollover dollars separately. Why? To make sure they follow the correct distribution rules tied to their origin as SIMPLE IRA funds.

What does this all mean? If you’re an employer thinking about switching from a SIMPLE IRA to a safe harbor 401(k) mid-year, this rule change gives you more flexibility and avoids penalizing employees in the process.

Just remember, while the penalty may be waived, the restrictions on accessing that money still apply.

Do you still have questions about retirement planning options?

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