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 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 (

Form 5304-SIMPLE (

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