Terminating SIMPLE IRA or SEP/IRA, followed by new 401(k) Plan

What happens with the accounts in a SIMPLE IRA when it ends? Does each participant then just have their own IRA that they maintain indefinitely? I believe they can roll over that IRA to a qualified plan but not until 2 years after the SIMPLE IRA ended.

Also, is there a standard form that needs to be presented to participants of a SEP IRA before the SEP IRA ends? Is there anything else the plan sponsor needs to execute. For example, when we terminate a qualified plan, an amendment needs to be executed before hand and if it is a pension plan then participants need to receive 204(h) notices before hand.

Thanks.

For a SIMPLE and a SEP the IRA accounts can just stay where they are. 
 

For terminating a SEP look at the bottom of this page:

https://www.irs.gov/retirement-plans/plan-sponsor/simplified-employee-pension-plan-sep

If you are using the SECURE 2.0 Section 332 (i.e., new Section 408(p)(11) of IRC) rules to terminate a SIMPLE and replace it with a 401(k) plan during the year, there is a special provision that allows people to move the funds into the 401(k) plan even if the 2-year rule is not met.  See IRC section 72(t)(6)(B), as amended.

Hi Ilene - I had a question on this. 

Section 332 of SECURE 2.0 waives the normal limitation on rollovers from a SIMPLE IRA within two years of initial participation by providing an exception to the 25% additional tax if an employer terminates the qualified salary reduction arrangement of a SIMPLE IRA plan and establishes a 401(k) plan. Such rolled over amounts are then subject to the distributable events set out in section 401(k)(2)(B) (restrictions on employee deferrals).

However, as this provision is merely an exception to the tax for new participants, can the general distribution rules for rollover contributions (that is, it is allowable to request a distribution at any time for rollover contributions, if the plan permits it) continue to apply to SIMPLE rollovers by participants who are subsequently beyond that two-year participation window? See IRS Notice 2024-2(G-4). 

The IRS Notice doesn’t specifically state this – however, it seems like the only reasonable conclusion. It would be completely unreasonable to have the 401(k)(2)(B) restrictions continue to apply AFTER the applicable “2-year” period has passed. However, reasonableness (or at least my take on what is reasonable) doesn't mean the IRS would agree!

Thanks.

Sorry it took me so long to respond.  There is no guidance as to your question. But it appears to me from the language of the law that a rollover of the SIMPLE money to the 401(k)  means that the rollover account is subject to 401(k) distribution limits forever.  The actual statutory language of 72(t)(6)(B) says:

B) Waiver in case of plan conversion to 401(k) or 403(b)

In the case of an employee of an employer which terminates the qualified salary reduction arrangement of the employer under section 408(p) and establishes a qualified cash or deferred arrangement described in section 401(k) or purchases annuity contracts described in section 403(b), subparagraph (A) shall not apply to any amount which is paid in a rollover contribution described in section 408(d)(3) into a qualified trust under section 401(k) (but only if such contribution is subsequently subject to the rules of section 401(k)(2)(B)) or an annuity contract described in section 403(b) (but only if such contribution is subsequently subject to the rules of section 403(b)(12)) for the benefit of the employee.

Section 401(k)(2)(B) is, of course, where the 401(k) distribution limits live.  This language is also repeated in Notice 2024-02.  So, the statute says that the contribution must be subjec tto 401(k)(2)(B) - it doesn't say just for the 2-year period.

If the participant wants to retain the right to take distribution, he/she should keep the money in an IRA.

Thanks Ilene.

18 hours ago, Ilene Ferenczy said:

Sorry it took me so long to respond.  There is no guidance as to your question. But it appears to me from the language of the law that a rollover of the SIMPLE money to the 401(k)  means that the rollover account is subject to 401(k) distribution limits forever.  The actual statutory language of 72(t)(6)(B) says:

B) Waiver in case of plan conversion to 401(k) or 403(b)

In the case of an employee of an employer which terminates the qualified salary reduction arrangement of the employer under section 408(p) and establishes a qualified cash or deferred arrangement described in section 401(k) or purchases annuity contracts described in section 403(b), subparagraph (A) shall not apply to any amount which is paid in a rollover contribution described in section 408(d)(3) into a qualified trust under section 401(k) (but only if such contribution is subsequently subject to the rules of section 401(k)(2)(B)) or an annuity contract described in section 403(b) (but only if such contribution is subsequently subject to the rules of section 403(b)(12)) for the benefit of the employee.

Section 401(k)(2)(B) is, of course, where the 401(k) distribution limits live.  This language is also repeated in Notice 2024-02.  So, the statute says that the contribution must be subjec tto 401(k)(2)(B) - it doesn't say just for the 2-year period.

If the participant wants to retain the right to take distribution, he/she should keep the money in an IRA.

Hi @Ilene Ferenczy,

What is your opinion on the effective date of the safe harbor plan?  Some are taking the position that as long as deferrals do not start until the day after the termination of the SIMPLE, the plan itself can be effective 1/1.  This way, you don't have a short initial year, and you don't need to prorate any limits other than max deferrals.  This wasn't addressed in S2.0 or the guidance, but I think it would violate the exclusive plan rule under 408(p)(2)(D). 

M&A Question - What if the employer is purchased and the buyer has a safe harbor 401k and a 403b for the non-profit group. I Assume this will not permit the mid year termination but if the SIMPLE terms on 12/31 will rollovers be allowed in the 2 year period since there is an existing 401k/b with the buyer? Or does it mean an actual new 401k plan has to be established by the employer? 

Thanks!