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  • Writer's pictureJordan Cross

Convert Your SIMPLE IRA to a 401(k) Plan Mid-Year

Switching to a 401(k) plan just got easier, thanks to the SECURE 2.0 Act


Starting in 2024, small businesses that offer a SIMPLE IRA can switch to a 401(k) plan mid-year. Beyond wealth accumulation and tax deduction opportunities far superior than available in a SIMPLE, offering a 401(k) can help make a retirement plan more competitive, benefitting the business owner, and the employees. Some of the benefits include providing higher contribution limits, a diverse investment lineup, and other features of a standard 401(k) that employees have come to expect. Switching mid-year will also open the opportunity to launch a Cash Balance Defined Benefit Plan in conjunction with a new Safe Harbor 401(k) Plan.


Making the Switch

The SECURE 2.0 Act made several changes to small business retirement plans, making it easier for these employers to offer a 401(k) plan. For the first time, ERISA (which sets the rules for retirement plans) allows employers to adopt an eligible 401(k) replacement plan mid-year. Previously, businesses couldn’t convert from a SIMPLE IRA to a 401(k) before the end of a calendar year due to the “exclusive plan rule,” which said that a SIMPLE IRA could be the only plan an employer maintained for the year. Breaking the news to Plan Sponsors that we had to wait a year to pivot to a 401(k) Profit Sharing Plan or waiting until the next year to sponsor a Cash Balance Defined Benefit Plan which historically, was a frustration point.


Under the new rules, eligible 401(k) replacement plans include a:

  • SIMPLE 401(k)

  • Safe Harbor 401(k)

  • 401(k) with a qualified automatic contribution arrangement (QACA) or

  • Starter 401(k) (new under SECURE 2.0)


For our plan sponsor, financial advisor, and Center of Influence relationships, we think the Safe Harbor 401(k) Plan will be the replacement plan of choice. Timing of the transition will be key as the new 401(k) plan must be effective immediately following the SIMPLE IRA plan’s termination. Additionally, the two-year investment requirement for SIMPLE IRAs to roll their money into a new, replacement plan is waived if the funds are rolled over to a 401(k) plan. Employers must continue to make SIMPLE IRA contributions until the plan’s termination date.


Annual deferral limits differ for the two plan types. If you convert to a 401(k) mid-year, participants’ elective deferral limits will be weighted and pro-rated by day (including catch-up contributions) for the replacement year.  CrossPlans is ready to support prospects with this limit and calculation on any illustrations.                 


Notice Requirements

Employers who adopt a 401(k) mid-year must provide two notices to participants at the same time:


  1. A SIMPLE IRA termination notice, which must be sent 30 days in advance of the plan’s termination date.

  2. A Safe Harbor notice, which may be sent 30 days prior to the new 401(k) plan’s effective date. This notice explains the plan’s provisions and prorated contribution limits.


Deciding to make the switch from a SIMPLE IRA to a 401(k) plan depends on the needs of the business, the business owner, and the employees. Whether a plan sponsor wants to attract and retain talent or you’re noticing other signs your business has outgrown your current SIMPLE retirement plan, we can help. Contact us to learn more about affordable small business 401(k) plans and how we can pivot away from a SIMPLE to offer a more robust solution.





Dana Point, CA


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