Employer Contributions for SIMPLE to 401(k) SECURE 2.0

I understand how the deferral limits are combined/prorated under the new SECURE 2.0 rules. This is not about that. this is about the employer contributions. 

Admittedly I haven't thought this all through, so there may be obvious considerations I have overlooked, so please feel free to point those out as well. 

Scenario A

SIMPLE IRA program is terminated as of 6/30/2024, new 401(k) plan effective 7/1/2024, calendar year plan. Assume all the requirements for a replacement plan under SECURE2.0 are met. The sponsor could do an employer contribution to the new plan, subject to the pro-rated 415 limits, correct? None of those contributions are combined for any limits with any employer contributions to the SIMPLE that I can tell. Is that correct? 

Scenario B

Same fact pattern, but the new plan is effective 1/1/2024 for employer discretionary contributions, with the deferral and safe harbor pieces effective 7/1/2024. In this scenario I think the 415 limit wouldn't be prorated for the new plan, and any employer contributions to the SIMPLE would also be ignored. 

Additional question: Since 415 limits are per participant, and also include deferrals, would the employee contributions to the SIMPLE IRA in scenario B have to be considered when checking the 415 for the new plan? I think the answer is NO, even though it would mean in theory a participant could end up with total contribution to the 401(k) plan that is the full 415 amount AND an employer contribution,  and they have their employee contribution to the SIMPLE for the first part of the year. So their total contributions in a single calendar year are higher than they would have been able to do if there had been only the SIMPLE or only the 401(k) plan for the year. 

What say all you lovely people? 

Perhaps an example with numbers might pique folks' interest, if only to tell me how I'm wrong. 😄

SIMPLE IRA program with a 4% employer contribution is terminated as of 9/30/2024, new 401(k) plan effective 1/1/2024 for employer discretionary contributions, with the deferral and safe harbor pieces effective 10/1/2024. Assume all the requirements for a replacement plan under SECURE2.0 are met.

Setting aside deferrals for a moment, assume an employee(under age 50) has full year compensation of $345,000. 4% of $258,750 (9months of comp), contribution to SIMPLE is $10,350. Since the 401(k) plan is effective 1/1/2024 the 415 limit is not prorated and the total employer contribution to the 401(k) plan could be $69,000. 
Total employer contributions for that single participant for 2024 $10,350 + $69,000 = $79,350

If that participant also did $16,000 employee contributions to the SIMPLE IRA then total contributions between the SIMPLE IRA and the 401(k) plan comes to $95,350. 
That doesn't seem quite right.... But I can't see anything that doesn't permit it...

Thoughts?

16 hours ago, justanotheradmin said:

Since the 401(k) plan is effective 1/1/2024 the 415 limit is not prorated and the total employer contribution to the 401(k) plan could be $69,000. 

The 401k plan cant be effective 1/1/24.  The transition year (the 401k portion of the year) has to begin on the day following the termination date of the SIMPLE, and end on the last day of the calendar year during which termination starts. 

2 hours ago, RatherBeGolfing said:

The 401k plan cant be effective 1/1/24.  The transition year (the 401k portion of the year) has to begin on the day following the termination date of the SIMPLE, and end on the last day of the calendar year during which termination starts. 

I wasn't suggesting the deferrals and safe harbor begin on 1/1/2024. The plan itself for employer contribution purposes only, would have a retroactive start dated of 1/1/2024, and the deferral and safe harbor portion has a special effective date of 10/1/2024. 
Do you think for some reason that isn't allowed? or wouldn't be a qualified replacement plan if structured that way? 

If it is allowed, what, if any, is the impact on the 415 limit for the plan for 2024?

35 minutes ago, justanotheradmin said:

The plan itself for employer contribution purposes only, would have a retroactive start dated of 1/1/2024, and the deferral and safe harbor portion has a special effective date of 10/1/2024. 
Do you think for some reason that isn't allowed?

To me its 100% clear that the SH plan itself cannot be effective prior to the termination date of the SIMPLE.

- 408(p) already says that the SIMPLE will not be considered a qualified salary reduction arrangement if the employer also maintained a qualified plan in the same year.

- The exception created by S2.0 is when a SH plan replaces a SIMPLE mid year, because the after the termination date, the SIMPLE is no longer maintained.  What 332 does is break the year into two periods, one with the SIMPLE and one with the SH.  The two plans cannot be maintained during the same period.

Sec 332(a)(11)

Quote

(A)IN GENERAL.—Subject to the requirements of this paragraph, an employer may elect (in such form and manner as the Secretary may prescribe) at any time during a year to terminate the qualified salary reduction arrangement under paragraph (2), but only if the employer establishes and maintains (as of the day after the termination date) a safe harbor plan to replace the terminated arrangement.

Sec 332 also defines the transition year as the period beginning after the termination date and ending on the last day of the calendar year during which termination occurs.

Unless I misunderstood, during the ERISApedia Secure 2.0 Grab Bag webinar, the speakers indicated you could add profit sharing back to first day of the year. However, they also indicated you could not add an additional plan (i.e. CBP). Anyone else hear it that way?

10 hours ago, RatherBeGolfing said:

The 401k plan cant be effective 1/1/24.  The transition year (the 401k portion of the year) has to begin on the day following the termination date of the SIMPLE, and end on the last day of the calendar year during which termination starts. 

I recall that as well, though if I recall think Derrin was on the fence, or was wanting more guidance before he decided one way or the other. I'd be curious to know if his thoughts change and he falls into one camp or another. 

17 hours ago, justanotheradmin said:

I recall that as well, though if I recall think Derrin was on the fence, or was wanting more guidance before he decided one way or the other. I'd be curious to know if his thoughts change and he falls into one camp or another. 

Yea Derrin said something along the lines of "I'm not sure that this was intended, but I don't think its prohibited based on the language".  The way it was discussed was more like this is an interesting question and here is my take, rather than this is what you can and cannot do.

At least that was my impression.  I still think that based on 408(p) and Section 332, the plan cant be effective prior to the SIMPLE plan term.

Has anyone considered whether this "replacement SH 401k plan" scenario can be used in the M&A context?  Target maintains a SIMPLE IRA; Buyer maintains a SH 401K plan.  If Target terminates the SIMPLE IRA as of close and then adopts the Buyer's SH 401k plan immediately after close, would the Buyer's SH 401k Plan be a plan that was established and maintained as of the date after the SIMPLE IRA termination date?   

Absent specific guidance, I'm inclined to say no because the IRS addresses SIMPLE IRAs in acquisitions in 408(b)(10) and decliend to clarify that the SH 401k replacement plan could be a Buyer's SH 401k plan.

Thanks for any thoughts.

The red text is my anaylysis.

From SECURE 2.0

“(11) REPLACEMENT OF SIMPLE RETIREMENT ACCOUNTS WITH SAFE HARBOR PLANS DURING PLAN YEAR.—

“(A) IN GENERAL.—Subject to the requirements of this paragraph, an employer may elect (in such form and manner as the Secretary may prescribe) at any time during a year to terminate the qualified salary reduction arrangement under paragraph (2), but only if the employer establishes and maintains (as of the day after the termination date) a safe harbor plan to replace the terminated arrangement.

It seems to me this is accomplished without regard to the effective date of the new Plan.  The only stipulation is that there be a safe harbor plan in place the day after the termination of the SIMPLE.  Nothing here precludes the Plan itself being effective 1/1/2024 (and thus the profit sharing component).  We have met the requirements necessary to terminate the SIMPLE IRA and there are no other restrictions.

From 408(p)(2)(D)(i):

An arrangement shall not be treated as a qualified salary reduction arrangement for any year if the employer (or any predecessor employer) maintained a qualified plan with respect to which contributions were made, or benefits were accrued, for service in any year in the period beginning with the year such arrangement became effective and ending with the year for which the determination is being made.

In my opinion, you can only read the text above to be completely obsoleted if the new provisions of SECURE 2.0 are met. That requirement simply must be considered as waived in the year a replacement plan is implemented.

This reminds of me of something I learned a while ago – the law says ONLY what the law says and nothing else.  There just isn’t anything in SECURE 2.0 regaridng when the replacement plan can be effective – ONLY that it be in place on the day after the term date of the SIMPLE.

OK now everyone tell me what I’m missing!

Thanks for your response Austin3515.  I think the language limiting mid-year termination of a SIMPLE IRA "only if the employer establishes and maintains (as of the day after the termination date) a safe harbor plan to replace the terminated arrangement" is what is giving me pause.  Congress chose to use "established and maintains" which to me requires the  plan be established (that is, initially effective) the day after the IRA termination.   

About the safe harbor component of these plans, during the ERISApedia SECURE 2.0 webinar they made a point of saying that the safe harbor contribution had to be nonelective.  I haven't seen that specified anywhere else, and the recent John Hancock webinar on SECURE 2.0 specifically stated that the safe harbor contribution could be nonelective or a match.  Is there a restriction to nonelective or not?

19 minutes ago, History said:

Is there a restriction to nonelective or not?

There is not.

Sec 332 states:

Quote

‘‘(D) SAFE HARBOR PLAN.—For purposes of this paragraph, the term ‘safe harbor plan’ means a qualified cash or deferred arrangement which meets the requirements of paragraph (11), (12), (13), or (16) of section 401(k).’’.

(11) is Simple

(12)(B) is SH Match

(12)(C) is SHNEC

(13) is QACA

(16) is Starter 401k (removed as an option in the proposed technical corrections bill since its a deferral only plan)

8 minutes ago, RatherBeGolfing said:

There is not.

 

Thank you!

5 hours ago, BentoBox said:

Thanks for your response Austin3515.  I think the language limiting mid-year termination of a SIMPLE IRA "only if the employer establishes and maintains (as of the day after the termination date) a safe harbor plan to replace the terminated arrangement" is what is giving me pause.  Congress chose to use "established and maintains" which to me requires the  plan be established (that is, initially effective) the day after the IRA termination.   

I disagree.  The law does not say "initially effective on or after the date of termination."  That's what I meant by the law only says what it says and doesn't say anything else.  Established / maintaned "as of the day after termination" to me leaves the door wide open for an effective date prior to they day after the termination.  If the Plan was effective January 1, 2024, with the 401k effective the day after the termination of the SIMPLE, then I'll be darned if someone can tell me I did not have a Plan in place  "as of the day after termination."  I did.

I hope others will chime in.  Hard to overstate how important this all is, and how very much in real time it is. These are happening right now...

12 hours ago, austin3515 said:

If the Plan was effective January 1, 2024, with the 401k effective the day after the termination of the SIMPLE, then I'll be darned if someone can tell me I did not have a Plan in place  "as of the day after termination."  I did.

You did have a plan in place "as of the day after termination date".  My issue with your hypo is that you also had a plan in place before the transition year (the period beginning after the termination date and ending on the last day of the calendar year during which the termination occurs".

Sec 332 adds adds 408(p)(11), which lets you terminate the simple mid year, and allows you to accrue benefits in the qualified plan during the "transition year".

By making the plan effective 1/1 for profit sharing, you are maintaining the qualified plan while also maintaining the Simple.  The reason you are allowed to terminate the Simple mid year is because you replace it with a qualified plan.  It seems clear to me that the intent is for one arrangement to be maintained at any point in the year, rather than allowing both to be maintained at the same time.

So, while I agree that 408(p)(11) does not specifically preclude the SH plan from being effective 1/1, I argue that 408(p)(2)(D)(i) already precludes you from doing this.  

Quote

An arrangement shall not be treated as a qualified salary reduction arrangement for any year if the employer (or any predecessor employer) maintained a qualified plan with respect to which contributions were made, or benefits were accrued, for service in any year in the period beginning with the year such arrangement became effective and ending with the year for which the determination is being made.

So, FWIW (nothing) here's my thought. Yes, the law says what the law says. But because that frequently isn't crystal clear in black and white, that's why we have regulations, Notices, Revenue Rulings, etc., and ultimately court cases.

Seems to me like the Congressional  intent was to require that the new plan be ESTABLISHED the day after. Just my opinion. But in the absence of some additional specific guidance, do you want to be the one out on the window ledge? I'm more cowardly by nature, and I wouldn't push the edge of the envelope.

You may well be right. I just wouldn't adopt your opinion, at least at this time.

Well FWIW I asked a guru and that person said they agreed with me (just sayin', LOL).  IF the worst sin I commit here is to use 12 months of the max comp limit in the absence of something definitive I will comfortably fall back on a good faith interpretation anyhow.  I sincerely hope ASPPA and company put something together on this stuff ASAP.  It's hard overestimate that if they don't provide the guidance now, it's almost not worth it.  Now is when these things are happening.  Like right now.

Interesting - thanks. BTW, just curious - are you really getting a mad rush of potential clients who want to convert mid-year? We haven't seen it.

Well I have done one already, I'm on my 2nd and my partner is doing 1 now too.  Mad rush?  No but if you multiply our experience by the hundreds of us there must be a ton going on, and its only Marc.  And when I asked my "guru" they said "It's amazing how many questions I'm getting on this topic."  Plus unlike something silly like self-certification of hardships, there are a lot of complexities to this.  What will an allocation look like in this year?  I haven't see anyone run through it yet and I think someone really needs to to give us some guidance here.

13 minutes ago, austin3515 said:

Well FWIW I asked a guru and that person said they agreed with me (just sayin', LOL).  IF the worst sin I commit here is to use 12 months of the max comp limit in the absence of something definitive I will comfortably fall back on a good faith interpretation anyhow.  I sincerely hope ASPPA and company put something together on this stuff ASAP.  It's hard overestimate that if they don't provide the guidance now, it's almost not worth it.  Now is when these things are happening.  Like right now.

I could probably argue both ways in good faith, but I agree that we need guidance ASAP so we can put a pin in it.  We have gotten plenty of requests already.

7 minutes ago, Belgarath said:

Interesting - thanks. BTW, just curious - are you really getting a mad rush of potential clients who want to convert mid-year? We haven't seen it.

Not a mad rush, but I have more than a handful so far.

We would like to be able to rely on 408(p)(11) in the M&A context and argue that the Buyer's ongoing SH 401k plan that will replace the terminated IRA in the transition year is "established" w/r/t the target company as of the date of close (assuming the IRA is terminated the day of close) and therefore satisfies the rule.  However, as noted by various comments above, the "established" language is making me cautious and in the absence of specific guidance from the IRS I'm hesitant to rely on this interpretation.  Thanks all for the interesting commentary.

I've had several as well already and there is lots more interest so I know quite a few more will come this year. 

I have a couple of these in progress myself. One odd thing I came across is that, due to different eligibility rules, there is an employee that is eligible for the SIMPLE Plan (and contributing) but she will NOT be eligible for the 401(k) Plan. Anybody see a problem with this?? 

Politically or legally, LOL.  The ones that I am doing I'm saying if you were eligible for the SIMPLE you're automatically in the 401k/.

LEgally, there is nothing in the law that says whoever is eligible for the SIMPLE has to be eligible for the 401k. I'm frankly surprised it does not say that, but it does not and as I mentioned above the law says what it says and it doesn't say anything else 🤣

But seriously, that's just rude, you should waive eligiblity for them anyway in my humble opinion (which is easier to say when it's not your money I get it).

2 hours ago, austin3515 said:

I'm frankly surprised it does not say that, but it does not and as I mentioned above the law says what it says and it doesn't say anything else 🤣

It also allowed Starter 401(k) as a replacement, which is deferral only...  not surprising that this was removed in the technical corrections bill.  Although, since that bill hasn't passed yet, I guess you could technically replace the Simple with a Starter 401(k), but that is really pushing it.

Any more guidance on this issue? Our team is transitioning a simple IRA to SH and the doctor would like to make profit-sharing contributions. Is the 415(c) limit prorated as well? 

Not that I have heard. We’re still waiting for guidance on mandatory Roth catch-ups which affects 100% of all plans basically. I guess the guidance team was DOGE’ed…. Plus isn’t there some policy that they have to remove like 3 regs for every new reg or something like that? 
 

my hope is that when ADP and Paychex and the rest called their people at IRS they told them what the final reg would say about how to apply the limits. Would be really messed up if different providers took different approaches because they can’t exactly re-reprogram their systems.

sorry to change topics!

415 limit is not pro rated. Pretty sure basic plan docs always say the 415 is never prorated for a new plan but don’t quote me, look in your BPD. In earlier posts I mentioned using an effective date of 1/1 but that was mainly for the comp limit. Not everyone agreed with that approach. Note that ALL DC plans are part of 415 limit so SIMPLE deferrals and Er counts towards 415.

Contributions under 408(p) are included under IRC section 415(c)? I am looking for that in 1.415(c)-1 and I’m missing that. Must not have read far enoug!