The Not-So-Simple Changes to SIMPLE IRAs
By Carrie Horn, CISP, CHSP, QPA, TGPC, SDIP
We have many clients with SIMPLE IRA plans that have been asking questions about the new contribution options that are available in these plans. Can an employer with a SIMPLE IRA plan start using some of the new provisions that were created under the SECURE and SECURE 2.0 Acts, such as the increased deferral limit, even though they’re not yet included in the SIMPLE IRA plan document?
Yes. Employers may now offer an increased SIMPLE IRA plan elective deferral limit, even though plan documents do not reflect the new provision. In fact, it may be required for some companies to allow these increased limits now, depending upon the size of the company. The increased elective deferral limits apply automatically in the case of an employer that has no more than 25 employees who received $5,000 or more in the preceding calendar year. This means that for the 2024 plan year, the elective deferral limit for these companies is automatically increased to $17,600 plus a catch-up contribution of up to $3,850 for employees who are age 50 and over (110 percent of the stated annual limit of $16,000 and catch-up contribution limit of $3,500).
For companies that employed 26-100 employees earning $5,000 or more in the preceding calendar year, the increased deferral limit is an optional provision that an employer can elect to offer. If the employer elects to apply this increased limit, the employer must also provide a higher matching contribution of four percent (increased from three percent) or an increased nonelective contribution of three percent (instead of two percent).The IRS clarified in Notice 2024-02 earlier this year that an employer must notify employees of the increased limits if they apply, whether it’s a mandatory increase, or whether the employer is choosing to allow the increase. This notice must be included in the Summary Description that is required to be sent annually to employees no later than 60 days before the beginning of the plan year (November 2). If the employer is choosing to offer the optional increased deferral provision, the employer must take formal written action to make an election to reflect the increased limits and should maintain documentation of the election in the plan’s records in addition to notifying employees with the Summary Description.
Employers can also make an additional nonelective contribution of up to 10 percent of compensation, not to exceed $5,000 (indexed for inflation) annually per eligible employee. This optional contribution is in addition to any employee deferrals and the required employer contribution. Employers that choose to make the additional nonelective contribution must notify employees within the Summary Description.
To assist employers in making these elections and documenting the elections for the plan’s records, Ascensus has created a new form, Additional SECURE and SECURE 2.0 Plan Provisions Employer Election Form, that can be used to make and document these elections. The form is designed to capture how the plan operates with respect to all new provisions (both mandatory and optional) under the SECURE and SECURE 2.0 Act. These provisions include increased deferral limits, additional nonelective contributions, optional Roth SIMPLE elective deferrals, and optional Roth SIMPLE matching or nonelective contributions. In addition, Ascensus has updated the Participation Notice and Summary Description and Salary Reduction Agreement forms to also reflect these new provisions, giving the employer the ability to indicate whether these provisions apply under the plan and giving the employees the updated information so that they may make informed decisions on how much to defer into the plan.
Keep in mind that the IRS has indicated that SIMPLE IRA plans will not have to be amended for these new SECURE and SECURE 2.0 provisions until December 31, 2026, at the earliest. It is important for employers to document their decisions on these new provisions and how they operated the plan so that the plan may be amended properly at that time.
We have a client that has a SIMPLE plan with us who is terminating the plan and replacing it with a 401(k) plan. He is asking us for a termination letter to give to his employees. Is this something that our financial organization should provide to him?
Even though it is not the financial organization’s responsibility to provide a SIMPLE IRA termination notice for an employer, Ascensus has created a Mid-Year SIMPLE IRA Plan Termination Notice that may be provided to employers to use for this purpose. As you know, an employer may now terminate a SIMPLE IRA plan at any time during the year as long as the employer is replacing the SIMPLE IRA plan with a safe-harbor 401(k) plan. The employer must give employees at least a 30-day notice that the SIMPLE IRA plan is terminating, and the notice must include specific information for it to be valid. It is up to the employer that is terminating the SIMPLE IRA plan to provide the termination notice to employees.
The Ascensus termination notice includes all information required to be given about the terminating SIMPLE IRA plan. The employer must also provide a notice regarding the new safe harbor 401(k) plan and should be able to obtain that notice from the 401(k) document provider.
Are new IRS model documents available yet?
As of this writing, the IRS had not yet released updated model Roth IRA documents. Additional guidance is needed to determine whether Roth SIMPLE contributions may be made to an existing Roth IRA or if they must be contributed to a separate Roth IRA. In addition, it is not known whether the IRS will create new employee-level Roth SIMPLE IRA documents. The 2023 Instructions for Form 8606, Nondeductible IRAs, reference using the form to report “distributions from Roth, Roth SEP, or Roth SIMPLE IRAs”, which may indicate that the IRS is intending to release new documents. It is up to your financial organization to determine whether you are ready to administer Roth SIMPLE contributions at this time.
