March 23, 2026      

Upgrading a SIMPLE IRA to a 401(k) Plan 

By Paul G. Masser, QKA

 

Every year we receive 401(k) proposal requests from small employers that have SIMPLE IRA plans.  There are very specific timing requirements when upgrading from a SIMPLE IRA to a 401(k) plan and proper planning is required. 

 

Reasons for Upgrading to a 401(k) Plan

A SIMPLE IRA is an easy and inexpensive option for small employers.  However, there are downsides:

 

• Inflexible employer contributions – 3% match or 2% non-elective is required.

• No vesting schedules – all employer contributions are immediately 100% vested.

• Participant loans are not permitted.

• Lower employee contribution limits than a 401(k) plan.

 

Which leads us to the benefits of adopting a 401(k) Plan:

 

• Employer contributions are significantly more flexible and can lead to larger tax deductions.

• Vesting schedules may be applied to employer contributions.

• Participant loans can be permitted.

• Roth employee contributions can be permitted.

• Higher employee contribution limits than a SIMPLE IRA.

• A 401(k) plan is perceived by many employees and recruits as a superior employee benefit.

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How and When to Upgrade to a 401(k) Plan

Prior to 2024, transitioning from a SIMPLE IRA to a 401(k) plan could only occur on January 1st.  With the passage of the SECURE 2.0 Act, this restriction no longer applies if the new plan being adopted is effective as of the date the SIMPLE IRA is terminated and is one of the following:

 

1.  A traditional Safe Harbor 401(k) plan;

2.  A QACA Safe Harbor 401(k) plan; or

3.  A “Starter 401(k) Plan” as defined in SECURE 2.0.

 

Unlike converting a profit sharing plan to a 401(k) plan, there is no way to directly convert a SIMPLE IRA to a 401(k) Plan.  The assets of a SIMPLE IRA can be rolled-over to a 401(k) plan but a participant cannot be forced to transfer the assets.  Prior to 2024 there was a 25% penalty if a participant rolled-over their SIMPLE IRA account to a 401(k) plan before they had at least 2 years of SIMPLE IRA participation. That penalty is now waived so long as the rolled-over funds are subjected to 401(k) plan distribution restrictions (age 59 ½, death, termination of employment, etc.)

 

An employer is required to notify employees 30 days in advance of the date the SIMPLE IRA will be terminated.  This notice must describe how the elective deferral limits, including catch-up contributions, are prorated during the replacement year.

Prorated contribution limits are based on the number of days covered in each plan.  In addition, a 401(k) Safe Harbor Notice must be distributed at least 30 days in advance of the date the 401(k) plan will become effective.

 

Preparation is the key to a successful upgrade from a SIMPLE IRA to a 401(k) Plan.  Proper plan design, employee education, and rollover planning will make the transition seamless for the employer and employees.  Now is the time to act so please don’t hesitate to contact us for more information on upgrading a SIMPLE IRA to a 401(k) plan.

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