Secure Act 2.0 Smooths Path for Small-Business Retirement Plan Do-Overs

During the year of transition, the total amount contributed as salary reduction contributions under the terminated SIMPLE IRA plan and as elective contributions under the safe harbor 401(k) plan cannot exceed the weighted average of the salary reduction contribution and elective contribution limits for each of those plans. This is based on how many days in the transition year that each plan was in effect.

SIMPLE vs. Safe Harbor

Initially, SIMPLE plans were limited to businesses with fewer than 100 employees who earned at least $5,000 in compensation. 

The contribution limits that apply to 401(k)s are higher than those applicable to SIMPLE IRAs. In 2024, for example, the 401(k) limit is $23,000 with a $7,500 catch-up option vs. $16,000 with a $3,000 catch-up option for SIMPLE IRAs.

A safe harbor 401(k) plan must receive 100% vested employer contributions, which can be made in the form of nonelective contributions equal to 3% of compensation, regardless of whether the employee chooses to contribute. In the alternative, the employer can elect to make matching contributions of 100% on the first 3% of compensation and 50% on the next 2% of compensation. When compared to a traditional 401(k), however, the safe harbor 401(k) offers lower administrative costs.

Employers must also make mandatory contributions to SIMPLE IRAs each year — either a 100% match of 3% of the employee’s contributions or a 2% non-elective contribution.

Before Secure Act 2.0, participants in SIMPLE IRAs could not roll contributed amounts over to the SIMPLE IRA for the first two years of participation. When an employer replaces the SIMPLE plan with a safe harbor 401(k), the amounts can be immediately rolled over to the replacement plan so long as that plan is subject to the same distribution restrictions that apply to 401(k)s.

Conclusion

Safe harbor 401(k)s can provide many benefits that the SIMPLE IRA option simply doesn’t offer. Higher contribution limits alone can be powerful when attracting and retaining employees. Now that making the transition has become easier, many employers may wish to evaluate the safe harbor 401(k) option going forward.

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