Simple 401(k) Plan converted to Regular 401(k) Plan - 2 year penalty exception

[TPA Bob]

We are converting a simple 401(k) plan as of January 1, 2021 to a regular 401(k) plan.  If we convert a participant's balance in the Simple to the regular 401(k) plan can we avoid the 25% penalty tax if some of the monies "converted" have not exceeded the 2 year limit for the 25% penalty tax.  We will continue to maintain separate accounts for the Simple 401(k) and the Simple Employer Contribution accounts in the new regular 401(k). 

Both plans (the old Simple and the new 401(k)) will be maintained by the same employer.  

Sources of money in the new 401(k) plan would be Simple 401(K) contributions, Simple Employer Contributions, Employee pre-tax 401(k), Employee Roth 401(k), and Employer Matching Contributions.

FYI, this is not a Simple IRA.  

 

[AbsolutelyOkayPossibly]

I thought only Simple IRAs had the 25% penalty. Not Simple 401(k)s.