IRA

Replacing a 401(k) plan with a SIMPLE IRA program

July 2, 2013

We often hear from advisors who are working with an employer in the process of terminating an existing 401(k) plan and replacing it with a SIMPLE IRA program.

For example, a small business employer with 5-6 employees originally established a 401(k) plan and during a recent review considered the features of a SIMPLE IRA plan. It may make sense for the employer to terminate the 401(k) plan and adopt a SIMPLE IRA program in its place.

Similar to a 401(k) plan, a SIMPLE IRA program also allows employees to defer income through salary deferral contributions – up to $12,000 in 2013 ($14,500, if age 50 and older). And, the employer contribution commitment is minimal – either 2% of compensation for all eligible employees or a match of 3% (which can be reduced to as low as 1% in some years) of compensation for the employees that are participating.

When terminating a 401(k) plan and adopting a SIMPLE IRA program, here are highlights of some things of which you need to be aware.

  • Under the exclusive plan rule, the employer may not maintain a SIMPLE IRA if any other plan is maintained during the same calendar year.
  • SIMPLE IRAs can only accommodate SIMPLE IRA funds.  401(k) funds cannot be moved/rolled into the SIMPLE IRAs. SIMPLE IRA participants who want to keep their 401(k) funds tax deferred will need to have at least two accounts –
    • a SIMPLE IRA – for employee deferrals and employer contributions, and
    • an IRA – for the rollover from the terminated 401(k) plan.
  • Loans are not permitted from SIMPLE IRAs, but they can be from 401(k) plans*.
  • Before age 59½, withdrawals from a SIMPLE IRA taken within the first two years of participation may result in an additional 25% federal tax, and withdrawals taken after two years of participation may result in an additional 10% federal tax (exceptions may apply).

For more information regarding SIMPLE IRAs, take a look at the following resources.

 

And, don’t hesitate to contact the Retirement Strategies Group at (800) 722-2233, ext. 3939 or email RSG@pacificlife.com should you have any questions or want additional information.

 

* While allowed, not all 401(k) plans may elect to offer loans to participants.

 

 

SIMPLE IRA Plan Checklist (irs.gov)

Form 5304-SIMPLE (irs.gov)

Picture of Pacific Life Annuities

Pacific Life offers a broad and diversified range of products and solutions designed to help individuals and families achieve asset growth, sustainable retirement income, and long-term financial independence. We also help businesses manage and fulfill their long-term retirement plan commitments to employees.

Pacific Life, its distributors, and respective representatives do not provide tax, accounting, or legal advice. Any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor or attorney.

Pacific Life is a product provider. It is not a fiduciary and therefore does not give advice or make recommendations regarding insurance or investment products.

Pacific Life refers to Pacific Life Insurance Company and its affiliates, including Pacific Life & Annuity Company. Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state. Each insurance company is solely responsible for the financial obligations accruing under the products it issues. 

Variable insurance products are distributed by Pacific Select Distributors, LLC (member FINRA & SIPC), a subsidiary of Pacific Life Insurance Company (Newport Beach, CA) and an affiliate of Pacific Life & Annuity Company. Variable and fixed annuity products are available through licensed third parties.

No bank guarantee • Not a deposit • Not FDIC/NCUA insured • May lose value • Not insured by any federal government agency