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Terminating a SIMPLE Can Be Simple, if Done Right

Posted by Nathan Carlson on Oct 30, 2015 2:26:06 PM
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There are many different forms of qualified retirement plans--among them, 401(k), profit sharing, defined benefit, ESOPs, 403(b), SIMPLE IRAs, and SIMPLE 401(k) plans.  One of the unique requirements of SIMPLE IRAs and SIMPLE 401(k) plans is that they must be the sole, exclusive plan of the employer for the entire calendar year.  In other words, an employer sponsoring a SIMPLE IRA or SIMPLE 401(k) cannot, in the same calendar year, also sponsor a regular 401(k) plan or any other qualified retirement plan. 

Since a SIMPLE plan can only be set up on a calendar-year basis (regardless of the employer's fiscal year), it can only be terminated at year-end.  To terminate a SIMPLE plan at year-end, an employer must notify its employees within a reasonable time prior to November 2nd of that year.


Employer X maintains a SIMPLE IRA in 2014 and wishes to switch to a 401(k) plan in 2015.  Employer X must issue a written termination-notification to its employees prior to November 2, 2014.  If Employer X does not issue this notice prior to 11/2/2014 it must continue to sponsor the SIMPLE IRA in 2015. 

SIMPLE IRA and SIMPLE 401(k) plans cannot be terminated mid-year.  They can only be terminated at year-end and with the appropriate and timely written notice. 

A couple other points:

  • The IRS does not need to be notified of the plan's termination.

  • A SIMPLE plan never files Form 5500, even when it terminates.

  • The termination-notification can be as simple as, "November 1, _____.  ABC Company has decided to terminate is SIMPLE [IRA or 401(k)] Plan effective December 31, _____."

  • Although the SIMPLE plan terminates at year-end, distributions or rollovers from the SIMPLE cannot occur until the plan is fully funded.  Employee contributions must be deposited as soon as administratively feasible but no later than 30 days after the close of the month for which the contributions were withheld.  Employer contributions must be made to the SIMPLE plan by the due date of the employer's federal tax return, including extensions.

  • At the election of the participant, distributions from a SIMPLE plan can be taken as taxable income or rolled to another qualified retirement plan, IRA, or another SIMPLE plan.

  • A 10% penalty applies to all cash distributions taken from a SIMPLE plan prior to age 59½[i].  Unless an exception applies, this penalty is increased to 25% if the withdrawal is taken within the first two years of when the employee first became a participant, measured from the date of the participant's first deposit into the SIMPLE plan. 

  • If the 25% penalty applies, the participant can 1) pay the penalty and take the distribution, 2) leave the funds in the SIMPLE plan until the two-year requirement has been met and then take a distribution (the 10% penalty would still apply if the participant is under age 59½, unless an exception applies), or 3) roll the distribution to another SIMPLE plan.  These funds cannot be rolled to any plan other than a SIMPLE plan as long as the 25% penalty applies.

For further information, contact the experts at Retirement Planning Services, Inc.

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[i] Certain exceptions do apply such as payments from the SIMPLE plan in substantially equal payments made over the life expectancy of the participant or joint life expectancy of the participant and spouse, or payments made on account of disability or death of the participant.

Topics: 401(k), SIMPLE IRA, Compliance

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