3710 / Are rollovers permitted from SIMPLE IRA plans?
Tax-free rollovers ( Q 4008) may be made from one SIMPLE IRA to another SIMPLE IRA at any time, but a rollover from a SIMPLE IRA to a traditional IRA is permitted only in the case of distributions to which the 25 percent early distribution penalty does not apply ( Q 3709).1 During the two year period that the 25 percent penalty is imposed, such a transfer would be treated as a distribution from the SIMPLE IRA and a contribution to the other IRA that does not qualify as a rollover contribution.2 To the extent that an employee is no longer participating in a SIMPLE IRA plan and two years have expired since the employee first participated in the plan, the employee may treat the SIMPLE IRA account as a traditional IRA.3
The SECURE Act 2.0 now allows an employer to terminate a SIMPLE IRA and replace it with a safe harbor 401(k)mid-year. When circumstances change, the law no longer require the employer to wait until year-end to terminate the SIMPLE plan and start up a 401(k). To take advantage of a mid-year termination, the employer must terminate the SIMPLE IRA by September 30 and must open a safe harbor 401(k) the day after termination. Employees must be given 30 days' notice of both the termination and the replacement. The notice must tell employees that no salary reductions to the SIMPLE IRA will be made based on compensation paid after the termination date. The employer must make matching contributions attributable to employee compensation earned through the termination date.
Planning Point: When employers decide to take advantage of the new mid-year termination option, employees do not have the benefit of making full annual contributions to either plan during the transition year. To calculate their annual contribution limits, the IRS uses a weighted average formula (contained in Notice 2024-02) that depends on the number of days that each plan was in effect during the relevant transition year, reduced by the SIMPLE account salary deferrals that had already been made for the transition year. Because of this, employees who have made larger SIMPLE deferrals early in the year may have lower remaining contribution limits when the safe harbor 401(k)is adopted.
Before enactment of SECURE 2.0, participants in SIMPLE IRAs could not roll amounts over contributed to the SIMPLE IRA for the first two years of participation. Post-SECURE 2.0, when the employer replaces the SIMPLE plan with a safe harbor 401(k), the amounts can be immediately rolled over to the replacement plan so long as that plan is subject to the same distribution restrictions that apply to 401(k)s (i.e., age 59 ½, death, separation from service, hardship, etc.). To ensure these restrictions are satisfied, the newly established plan must separately account for amounts rolled over from the SIMPLE IRA.
1. IRC § 408(d)(3)(G).
2. Notice 98-4, 1998-1 CB 25.
3. General Explanation of Tax Legislation Enacted in the 104th Congress (JCT-12-96), p. 141 (the 1996 Blue Book).