CWF Logo


January 2024

Finally the IRS Issues Needed Guidance on SECURE Act 2.0 Changes for SIMPLE-IRA Plans

On December 20, 2023 the IRS finally issued guidance regarding various law changes in the SECURE Act 2.0 impacting SIMPLE-IRA plans. Some of these changes are effective for the 2023 tax year. There are three sections within SECURE Act 2.0 with law changes for SIMPLE-IRA plans. These are sections 112, 601 and 332.

Change #1 from Section 601. Roth SIMPLE-IRA Contributions
The IRS clarifies that an employer which sponsors a SIMPLE-IRA plan is not required to amend its plan to offer its eligible employees the right to designate his or her elective deferral contribution or the employer’s matching contribution or the employer’s nonelective contribution as a Roth contribution. The employer has the right to write the plan to require that all contributions be traditional contributions Congress hopefully will confirm that the IRS position is what Congress intended.

If an employer amends its respective plan to allow its employees the right to elect to have the employer contribution be a “Roth” contribution, then an employee must have the right to decide whether his or her elective deferrals will be standard deferrals, Roth deferrals or a combination of both.

An employer can make a Roth contribution on behalf of an employee only if the employee has previously made his or her election that a Roth contribution is desired.

The IRS does not require that there be a second Roth SIMPLE-IRA, plan agreement. The law and the IRS require that a separate account is established for all Roth SIMPLE-IRA contributions and related earnings or losses. In many cases there will be improved administration capabilities if a separate Roth SIMPLE-IRA is established.

Once a Roth SIMPLE-IRA contribution is made that contribution type cannot be changed or corrected. It is irrevocable.

An employee who elects to make a Roth SIMPLE-IRA elective deferral is required to include such contributions in taxable income for the year the payroll is paid.

The employer may make its Roth SIMPLE-IRA matching contribution or Roth SIMPLE-IRA non-elective contribution the same year or it might be made the following year An employee is required to include such contributions in taxable income the year the employer makes this type of contribution.

When an employee elects to make a Roth SIMPLE-IRA elective deferrals those deferrals are subject to income tax withholding, FICA and FUTA

When an employer makes a Roth matching contribution or a Roth nonelective contribution such amount are not subject to income tax withholding, FICA and FUTA.
The employer has the duty for each employee to report these contribution types. The employee will be informed of his or her Roth elective deferrals on Form W-2 and the Codes For Swill be used. The employer’s matching or nonelective contributions will be reported on Form 1099-R.

Change #2 from Sections 116 and 117. Increase in SIMPLE-IRA Contribution Limits.
Section 116 permits an employer to make an additional nonelective contribution to eligible employees. This additional contribution may be up to 10% of compensation, but it is limited to $5,000 for each employee. The IRS does not indicate when this change was effective, but it is effective for 2023.

Section 117 increases for certain employers the annual limit applying to elective deferrals and the annual limit for making catch-up contributions for persons age 50 or older. The increased limits are 110% of the otherwise applicable limits for 2024. Thus the two limits applying for 2024 to individuals under age 50 are $16,000 and $19,500 and the two limits applying to individuals age 50 or older are $17,600 and $21,450.

This increase in the limits are automatic for some employers. This increase in the limits are automatic for an employer that has no more than 25 employees who received at least $5000 of compensation for the preceding calendar year.

This increase in the limits will apply to an employer that has more than 25 employees who received at least $5000 of compensation for the preceding calendar year only if the employer so elects. An employer who elects to have the new higher limits apply must increase its matching contribution to be 4% of compensation rather than 3% or the employer must increase its nonelective contribution from 2% of compensation to be 3%.

In determining whether the 25 employee limit is met or exceeded an employer must consider all employees regardless if they are eligible to participate in the SIMPLE-IRA plan. There generally is a 2 year grace period for the 25 employee limit. The grace period does not apply if the increase in the number of employees is on account of an acquisition, or similar transaction.
An employer must notify its eligible employees of the increased limits. This information must be set forth in the annual employer notification. If an employer had to make an election and made such election, it stays in effect until it is revoked by the employer.

The IRS does not discuss how the notice was to be furnished for 2024 by an employer who was not required to make any election. CWF recommends sending out a special notice now.
The IRS does discuss how the notice requirement applies to an employer who must make the election to have the increased limits. The IRS states that an employer must make the election before the employer provides the annual notice. This seems to state that an employer will not be able to use the new limits until 2025. Employers will need to discuss and rely on their tax advisers. The fact that the IRS was late in furnishing necessary guidance should not mean that the new limits do not apply for 2024.

Change #3 from Section 332. Replacing A SIMPLE-IRA Plan Mid-Year With a Section 401(k) Safe Harbor Plan.
The law has been changed effective in 2023 so that at any time during the year an employer may terminate its SIMPLE-IRA if the employer adopts as a replacement plan a safe harbor section 401(k) plan. The existing law that an employer is unable to terminate its SIMPLE-IRA plan midyear continues to apply with this one exception. The SIMPLE-IRA plan is replaced with a safe harbor 401(k) plan.

In order to terminate a SIMPLE-IRA plan an employer must adopt a formal written document which specifies the plan’s termination date. An employer must notify its employees at least 30 days before the termination date. The employees must be notified that there can be no elective deferral contributions made with respect to compensation earned after such termination date and that an employer remains obligated to make its matching contributions or nonelective contributions for the period prior to the termination date. An employer should also notify the SIMPLE-IRA custodian and payroll provider. An employer must keep the records relating the plan’s termination.

Once the plan is terminated there is now a new rule that permits a participant who has not met the 2 year rule but who has taken a distribution to rollover their SIMPLE-IRA funds into the new safe harbor 401(k) plan. This is the only exception to the 2 year rule which provides no rollover is authorized if the 2 year rule has not been met.

An employer will have the duty to furnish a new notice (summary description) to the participants of the safe harbor 401(k) plan describing their rights to make elective deferrals, including what is the maximum amount which may be contributed for the remainder of the year.

A person will have to determine what their maximum contribution amount is. A 401(k) plan has a higher limits than the SIMPLE-IRA plan. The total contribution amount to the safe harbor section 401(k) plan is equal to:
(1) The annual contribution limit for a SIMPLE-IRA plan, including any catch-up multiplied by a fraction equal to the number of days the SIMPLE-IRA plan was in effect divided by 365, plus
(2) The annual 401(k) contribution limit for a 401(k) plan, including any catchup amount multiplied by a fraction equal to the number of days the 401(k) is in effect divided by 365, minus
(3) Any SIMPLE-IRA contributions made for the year.
Although the law has been changed to allow an employer to replace its SIMPLE-IRA plan with a safe harbor 401(k) plan, many small employers may for simplicity reasons I choose to terminate its 401(k) plan and replace it with a SIMPLE-IRA plan. That change, however, may not take place midyear.

© 2024 Copyright Collin W. Fritz and Associates, Ltd. “The Pension Specialists”