Post SECURE Act 2.0: Waiving Two-Year Penalty for Terminated SIMPLE IRAs

Post SECURE Act 2.0, employers are entitled to terminate SIMPLE IRAs mid-year and replace those plans with safe harbor 401(k)s. SIMPLE IRA owners are then allowed to roll over their accounts into the new safe harbor 401(k) without incurring any penalties, even if the otherwise-applicable two-year waiting period for SIMPLE IRAs has not ended. Employers interested in this strategy must remember that distribution restriction will apply to the rolled-over amounts within the first two years of the individual's participation in the plan. Those restrictions provide that the rolled-over amounts can only be distributed in the case of reaching age 59.5, hardships, severance from employment, disability, death, qualified reservist distributions, plan terminations, for some lifetime income investments and, newly, for long-term care. To ensure these restrictions are satisfied, the newly established plan must separately account for amounts rolled over from the SIMPLE IRA. For more information on the rules governing SIMPLE IRA rollovers, visit Tax Facts Online. See Q3710