Kids can certainly outgrow their clothes, and so can employers with their retirement plans. A SIMPLE-IRA may have worked in the beginning, but if you want to change to a 401(k) plan in 2019, November 2 is the deadline to take action.
Employers must provide notice to their employees by that date that 2018 will be the last year for the SIMPLE; and that it will be replaced by a 401(k) plan. Why change from a SIMPLE to a 401(k) Plan? A SIMPLE is relatively inexpensive to administer, but here’s why 401(k) may be better for you.
401(k) plans offer several advantage over SIMPLEs. They can:
- Provide larger tax deductible contributions
- Favor owners and highly compensated employees
- Have a more restrictive vesting schedule; and eligibility provision
- Offer the Roth after-tax option
- Allow for plan loans
- Provide better creditor protection
But in order to make the change, here are a few matters to keep in mind:
Termination. An employer cannot terminate or amend a SIMPLE in the middle of the year. Once started it must be continued for the entire calendar year, funding all contributions promised in the employee notice for 2018.
Required Notice. As mentioned above, employees must be notified within a reasonable time prior to 60 days before the end of the year, i.e., November 2, 2018, that the employer will discontinue the SIMPLE effective the following January. If this notice is not timely provided, the employer must continue to sponsor the SIMPLE in 2019 and cannot establish another qualified plan such as 401(k) that same year.
Rollovers/Transfers. The tax rules regarding a rollover or transfer from a SIMPLE to another qualified retirement plan are very complicated. In general, an employee cannot transfer money tax free to a 401(k) during the 2-year period beginning when the employee first participated in the SIMPLE. The 2-year period begins on the first day on which the employer deposits contributions in the employee’s SIMPLE.
Continued Compliance. The SIMPLE must continue to be kept in compliance prior to its termination. Prior document or operating mistakes should be corrected to preserve the tax advantages.
Just like clothing, a “one size” fits all doesn’t work for every employer. Which type of plan is best is, of course, based on each employer’s situation.