Things to Consider Before Converting Your SIMPLE Plan to a 401(k) Plan

Simple IRA vs 401k

A SIMPLE (Savings Incentive Match Plan for Employees) is a go-to choice for people who own small businesses or are launching them.

If the business continues to prosper, increased flexibility in plan provisions is required. That’s when a switch or a rollover should be considered. Certain things should be kept in mind while rolling over from a SIMPLE plan to a 401(k) plan.

The Difference Between a 401(k) and a SIMPLE Retirement Plan

  • A SIMPLE IRA is designed for small businesses with 100 or fewer employees while a 401(k) plan can be offered by any employer.
  • SIMPLE IRA offers low contribution limits than a traditional 401(k) plan.
  • Employer contributions are compulsory in SIMPLE IRA while optional in 401(k) plans.
  • Employees are fully vested in SIMPLE IRAs while 401(k) plans have different vesting rules for employer contributions.

Pros and Cons of a 401(k) Plan

Below is a list of the most notable pros and cons associated with 401(k) plans:

The Pros

  • Attracts a skilled workforce.
  • Highest employee and total contribution limits. $19,000 + $6,000 catch-up and $56,000($62,000 including catch-up contributions) for 2019, respectively.
  • Roth (pre-tax) and voluntary (after-tax) contributions are allowed.
  • Flexible eligibility and contribution choices.
  • Availability of Hardship withdrawals (with early withdrawal and tax penalties applied).
  • Availability of participant loans (up to $50,000 per year can be borrowed with a competitive interest rate).
  • Compatibility for Advanced Plan Designs.
  • Participants can forego taking RMDs from their 401(k) until they retire if they have a 5% ownership.

The Cons

  • 401(k) plans are expensive than SIMPLE plans. The expenses range from $1,500 to $4,000 per year.
  • Year-end compliance testing, loan, and hardship distribution and filing of IRS forms annually require a third-party administrator (TPA). Hence greater investment in administration is required.

Pros and Cons of a SIMPLE IRA Plan

Below is a list of the most notable pros and cons associated with SIMPLE IRA Plans:

The Pros

  • They are inexpensive. Custodians offer SIMPLE plans for little to no cost.
  • Minimal administrative requirements.

The Cons

  • Lower employee contribution limits. $13,000 + $3,000 catch-up for 2019.
  • Employer contribution options are rigid. They are only limited to a 3% matching contribution or 2% non-elective contribution.
  • Participant loans are not allowed.
  • No flexibility for other retirement plans.
  • Employer contributions must be 100% vested for employees and the plan can’t be terminated mid-year.
  • Only pre-tax contributions are allowed. Hence, Roth and after-tax contributions can’t be exercised.

IRS Rules to Keep in Mind

SIMPLE IRAs work on a calendar year basis. An IRA 401(k) rollover requires some planning due to the rules enforced by the Internal Revenue Service:

  1. SIMPLE IRAs cannot be terminated in the middle of the year.
  2. No other retirement plans can be continued with a SIMPLE IRA for a particular year.
  3. Plan participants must be notified at least 60 days in advance (November 2) for SIMPLE IRA termination at year-end.

Things to Consider (For Employers)

Mid-year termination of a SIMPLE Plan is not allowed. For that reason, you should start preparing at least 3 months prior to the November 1st deadline. Notifying the participants about the plan termination at year-end, having a plan design set, and communicating with the service providers are some of the tasks that must be fulfilled for a smooth conduction of the termination.

Things to Consider (For SIMPLE IRA Participants)

SIMPLE IRA participants can roll their account to a new 401(k) plan under the 2-year rollover rule. For the first two years, a SIMPLE IRA can only be rolled over to another SIMPLE IRA. Participants can also seek guidance from retirement planning advisors for an even conversion. The 2-year period starts as soon as the first contribution is made. Once the 2-year period ends, participants can roll over to a 401(k) plan.

Benefits of Consulting a Retirement Advisor

A third-party retirement advisor can help with an array of financial services such as best fixed annuities, IRA legacy planning, wealth management advisor, and life insurance. They can also provide IRA/401(k) rollover assistance and highlight the benefits based upon the client’s requirements.


Choosing a retirement plan is crucial for both employers and the employees. A SIMPLE plan is less complex and works fine for small businesses with less than 100 employees. A 401(k), on the other hand, attracts a skilled workforce due to its numerous benefits and flexible nature. Be mindful of your business requirements and long-term expectations before choosing a retirement plan. The aforementioned details are helpful for the smooth transition of benefit plans.

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