It’s hard to believe, but we are quickly approaching the end of 2021. If you’ve been putting off establishing a Safe Harbor 401(k) for your business, now is a great time to act, as two major deadlines concerning Safe Harbor and SIMPLE IRAs approach.
First, the deadline to establish either a Safe Harbor 401(k) plan occurs on October 1.
Secondly, another deadline is approaching for companies that currently sponsor a SIMPLE IRA plan. November 1 is the date that notices need to be distributed for clients that intend to move from a SIMPLE IRA plan to a Safe Harbor 401(k) plan. However, it’s also important to note that SIMPLE IRA plans have an exclusivity rule, so once they are started for the following year, they must stay in place until the beginning of the next year.
Why Switch From A SIMPLE IRA To A Safe Harbor 401(k) Plan?
- Higher Deferrals Limits for Owners and Family Members. On average, you can contribute up to $7,000 more annually to a Safe Harbor 401(k) account.
- Roth 401(k) With the Roth 401(k) option, participants contribute after paying tax, so distributions will be tax-free in retirement. With a SIMPLE IRA plan, there is no choice but pretax deferrals. As an additional bonus, with a Roth 401(k), there are no required minimum distributions at age 72.
- Cost. If you have a SIMPLE IRA plan that has been in place for a number of years, and you are able to capture a significant amount of assets and roll them into a new 401(k) plan, you can significantly decrease investment expense in many cases.
- Retirement Plan Leakage. SIMPLE IRA plans have no guardrails when it comes to distributions. An employee can literally withdraw money, including the company matching contribution, the day after deposits hit their account. A 401(k) plan can put restrictions on how and when an employee can take out money. Even if a 401(k) plan allows for loans, the participant is required to pay the money back into the plan. This ensures that the retirement plan does as it is intended – help save for retirement. Both loans and hardship withdrawals are optional features that an employer can choose to offer with their 401(k) plan.
- Profit Sharing Contribution: SIMPLE IRA plans do not permit owners to make discretionary profit sharing contributions at year end. With a 401k plan, we can design an advantageous discretionary profit sharing allocation that is based on employee ages and compensation.
Making the switch from a SIMPLE IRA plan to a Safe Harbor 401(k) plan is easily accomplished. The 401(k) offers more flexibility and options, which is likely why they also have higher contribution rates and balances. With SIMPLE IRA plans, employers can’t offer another retirement plan nor can they make a contribution other than the required non-elective or matching contribution.
If you have clients that you would like to discuss, please reach out to a member of our Rea retirement plan services team. We are happy to provide you with a complimentary analysis of your current plan and discuss the best options for you.
By: Paul McEwan, CPA, MTax, AIFA (New Philadelphia Office)