Terminate a SIMPLE, Start a New SH 401(k) Plan

Employer employs four employees, none of who are catch-up eligible.  Employer currently has a SIMPLE with the 3% match approach.  No salary deferrals have been made in 2025.

• It’s our understanding that the increased deferral limit of $17,600 in the SIMPLE is automatically in place for 2025.  Is that right?

   

If they terminate the SIMPLE as of 6/30/2025, then start a new SH 401(k) plan effective 7/1/2025, (distributing all required notices timely and communicating the pro-rata deferral limits in each plan ($8,727.67 / $11,846.58) specific to each participant), for the initial plan year:

• Is Compensation from 1-1-2025 to 6-30-2025 for purposes of calculating the 3% match in the SIMPLE, if any salary deferrals are made?
• Is Compensation from 7-1-2025 to 12-31-2025 for purposes of calculating the Employer contributions (Safe Harbor, Profit Sharing, Discretionary Match) in the 401(k) plan, or could the 401(k) plan be written to use full-year (1-1-2025 to 12-31-2025) compensation for allocation purposes for the first plan year?
• Can the new Safe Harbor plan use the Match approach, or does it have to use the Non-Elective approach?
• Is the SIMPLE match (if any) completely disregarded in the 401(a)(4) test in the 401(k) plan?

They will be well under the 25% deduction limit between Employer contributions made to both plans.

Thanks in advance for your input on this.

1. It’s our understanding that the increased deferral limit of $17,600 in the SIMPLE is automatically in place for 2025.  Is that right?

If they have 25 or fewer employees paid over $5000 in FICA wages in the prior year, then it would be automatic. If they have over 25, then it applies if the 3% nonelective or the 4% match is elected to be provided instead of the lower 2%/3% amounts. I think it also needs to be disclosed in the notice provided to participants in the SIMPLE regarding amounts they can defer.

And, in your calcs, don’t forget about the super catchup limits for age 60-63.

2. Is Compensation from 1-1-2025 to 6-30-2025 for purposes of calculating the 3% match in the SIMPLE, if any salary deferrals are made?

Yes.

3. Is Compensation from 7-1-2025 to 12-31-2025 for purposes of calculating the Employer contributions (Safe Harbor, Profit Sharing, Discretionary Match) in the 401(k) plan, or could the 401(k) plan be written to use full-year (1-1-2025 to 12-31-2025) compensation for allocation purposes for the first plan year?

Yes, absent guidance to the contrary, the plan could be written either way. The terms of the 401(k) plan document will dictate that.

4. Can the new Safe Harbor plan use the Match approach, or does it have to use the Non-Elective approach?

Yes, either one, or a QACA match or QACA 3% safe harbor would satisfy the requirement. I haven’t checked, but maybe a starter safe harbor 401(k) might be possible too - you’ll have to look that up for me.

5. Is the SIMPLE match (if any) completely disregarded in the 401(a)(4) test in the 401(k) plan?

Yes. SIMPLE IRA contributions are not subject to nondiscrimination testing and, my favorite, they are also not annual additions.

Thank you very much for your detailed response, it's very much appreciated!