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Want to replace your SIMPLE with a 401(k) Plan? Employers must take action by November 2nd to adopt a new Plan in 2016.

October 20, 2015

Do you know someone or have a client that has a SIMPLE (IRA or 401k) that may be interested in adopting a fully qualified 401(k) Plan? Now is the time to begin making a change.

As the name suggests, SIMPLE plans are popular among small businesses that want to offer retirement benefits with minimal expense, administrative burden and compliance requirements. In exchange for the ease of operation, SIMPLE plans offer a much lower ceiling for annual benefits than other Retirement Plans, and they lack flexibility in the provisions and benefits that can be offered.

As business needs and objectives evolve, many SIMPLE plan adopters desire more than the SIMPLE plan can offer.  A high earning participant in a 401(k) Plan can receive an annual benefit as high as $53,000 in 2015, excluding catch-up contributions.  In a SIMPLE Plan, the same participant could receive no higher than $20,450.  In addition to the possibility of richer benefits, a fully qualified plan, for example, offers flexibility in allocating employer contributions to maximize or more greatly benefit owners and key employees, as well as in designing eligibility and vesting conditions. This flexibility also presents the opportunity to engage a qualified Third Party Administrator,such as JM Pension Advisory, to design a customized plan that best suits the needs of the adopting business.

Two important restrictions of SIMPLE plan to consider for the purpose of converting to a new Plan are:

  1. The SIMPLE plan must be maintained for a full calendar year (January-December) and,
  2. No other Retirement Plan may be offered by the Employer during that year.

The restrictions of the SIMPLE plan mentioned above are all too important as the year winds down for businesses that are interested in upgrading their retirement plans. In order to convert from the SIMPLE plan to a qualified 401(k), Profit Sharing, or Defined Benefit Plan, the following steps must be followed:

Step 1: Notify your employees by November 2nd that the SIMPLE plan will be discontinued in 2016.

Step 2: Notify your payroll provider and the financial institution that maintains the plan assets of the SIMPLE that contributions will cease at the end of 2015. IRS does not need to be notified of the termination of the SIMPLE.

Step 3: Contact a Third Party Administrator, such as JM Pension Advisory, to establish a new Plan to be effective in 2016. Once engaged, JM Pension would provide plan design consultation and a pre-approved plan document. Businesses that want to keep a Plan in place without interruption following the termination of the SIMPLE should contact us ASAP to begin the process of implementing a new Plan.