7 Things to Consider Before Switching from a SIMPLE IRA to a 401(k) Plan
Many businesses looking to start a retirement plan for their employees choose to utilize the SIMPLE IRA plan. There are several reasons business owners make this decision, including the low administration burden and reduced cost. However, as a company grows it may be more beneficial and cost effective to utilize a 401(k) retirement plan.
Below are several reasons why a 401(k) plan might be the better option for you and your employees.
- Employee limitation. If you have more than 100 employees, you are not allowed to have a SIMPLE IRA plan.
- Employee contribution limits. The SIMPLE contribution limit is $13,000 and $3,000 for a catch-up contribution (those age 50 or older), while 401k limits are $19,000 and $6,000. If you have employees, including yourself, who would prefer to contribute more than the SIMPLE limit, you should consider a 401(k) plan.
- Employer contributions. If company profitability improves and you would like to share it with all or some employees by putting it into their retirement plan, a 401(k) plan is required. This is not possible with a SIMPLE.
- Eligibility. Many times, part-time employees or employees under the age of 21 must be included in a SIMPLE plan. However, it’s possible to restrict part-time or certain classes of employees with a 401(k) plan.
- Administration. If you allow employees to choose where to open their SIMPLE IRA accounts, the administration of transferring money to several firms could become challenging. A 401(k) plan simplifies this burden by allowing the owner/trustee to select where the plan will be invested.
There are many great reasons to make the switch to a 401(k) plan, but there are things you need to know before switching plans.
- A SIMPLE IRA plan must be the only retirement plan in effect during the year.
- SIMPLE IRA plans need to be terminated by year-end.
- SIMPLE IRA plans cannot be terminated mid-year.
- You must give employees a 60-day notice (by November 1) that the SIMPLE IRA plan will be terminated at the end of the year.
- If the employee notification does not happen by November 2, 2019, for instance, a 401(k) plan cannot commence until January 1 of the year 2021.
- The SIMPLE IRA plan provider should be notified of the plan termination and made aware that contributions will not continue after year-end.
- There is a two-year rule for all SIMPLE accounts. A 25% penalty applies if an employee closes or transfers a SIMPLE IRA to a Traditional IRA or 401(k) before two years has passed since the date the SIMPLE IRA account was opened.
Stephen Palm, CFP®