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SIMPLE IRA Plan Termination and Two-Year Rollover Rule

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“One of my clients terminated his SIMPLE IRA plan at the end of 2023 and established a 401(k) plan beginning 2024. He’s worried about the two-year waiting period for distributing assets held in the now terminated SIMPLE IRA plan. Is there any leeway with the waiting period for a terminated SIMPLE IRA plan?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor in Ohio is representative of a common inquiry involving a savings incentive match plan for employees SIMPLE IRA plan.

Highlights of Discussion
Yes, there is, and we just received more clarification on this issue in IRS Notice 2024-02. You are aware that a distribution from a SIMPLE IRA within the first two years of an individual’s participation in the SIMPLE IRA plan, potentially, is subject to a 25 percent early distribution penalty tax unless the amount is being moved to another SIMPLE IRA plan or a penalty exception applies.

Section 332(b) of the SECURE Act 2.0 adds Internal Revenue Code (IRC) Sec. 72(t)(6)(B) to the IRC and amends IRC Sec. 408(d)(3)(G). Under the addition and amendment, if an employer terminates a SIMPLE IRA plan and establishes a 401(k) plan [or 403(b)] plan that limits distributions (as described next), then the two-year waiting period on rollovers from the terminated SIMPLE IRA to the 401(k) [or 403(b)] does not apply, provided the rollover contribution is subject to the receiving plan’s distribution restrictions (Q&A G4 of Notice 2024-02).

In the case of a 401(k) plan, distributions must be limited to those triggers listed in IRC Sec. 401(k)(2)(B):
• Severance from employment,
• Death,
• Disability,
• Plan termination,
• Attainment of age 59½,
• Hardship,
• As a qualified reservist distribution,
• For certain lifetime income investments and
• As qualified long-term care distributions.

Further, amounts may not be distributable by reason of the completion of a stated period of participation or the lapse of a fixed number of years (e.g., no in-service distributions prior to age 59 ½). Be sure to check the 401(k) plan document for its treatment of rollover contributions. Some plans allow distributions of rollover amounts at any time.

For 403(b) plans, rollover contributions from the terminated SIMPLE IRA plan must be limited to those triggers listed in IRC Sec. 403(b)(11), which are similar to those listed above.

Conclusion
Under SECURE Act 2.0, with clarification by Notice 2024-02, if an employer terminates a SIMPLE IRA plan and establishes a 401(k) plan [or 403(b)] plan that limits distributions as prescribed, then the two-year waiting period on rollovers from the terminated SIMPLE IRA to the 401(k) [or 403(b)] does not apply, provided the rollover contribution is subject to the receiving plan’s distribution restrictions. An in-service distribution provision before age 59 ½ would not align with the necessary distribution restrictions for the waiver.

© Copyright 2024 Retirement Learning Center, all rights reserved
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Reducing PBGC Premium Costs

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“One of my plan sponsor clients with a defined benefit plan asked me about ways to reduce the Pension Benefit Guaranty Corporation (PBGC) premiums the company pays. Do you have any ideas to help save on costs?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor in Illinois is representative of a common inquiry involving PBGC premiums.

Highlights of Discussion
The 2024 PBGC premium rate per participant is $101 and could be even higher for underfunded plans. Therefore, decreasing the participant count in a plan can help reduce PBGC premiums.

After reviewing the plan details, RLC’s consultants noted the plan had many former employees with small benefit amounts and a number of retirees taking benefits. Several strategies are available that can reduce the number of participants and thus the PBGC premium costs, including the following.

First, SECURE Act 2.0 has increased the cash-out amount limit from $5,000 to $7,000, and this feature would allow the plan sponsor to require separated participants with benefits under this threshold to take distributions. (See a prior Case of the Week New Cash Out Limit-Mandatory or Not?) This tactic removes the former participants from the plan and, consequently, the number of participants for which PBCG premiums are due. To illustrate how this is applied, reducing the participant count by 10 could reflect $1,010 in savings (10 x $101) in premiums. The PBGC premium rates are also indexed each year, so savings for future years would be higher.

Next, for participants currently taking benefits, a “lift out” strategy could be used whereby an insurance carrier essentially buys these participants out of the plan and the carrier takes on the obligation to pay benefits. Once the transaction is completed the participants are no longer in the plan and PBGC premium savings are realized.

Conclusion
Depending on the circumstances of the plan, there may be ways for defined benefit plan sponsors to reduce their PBGC premiums, including utilizing enhanced cash-out provisions and lift-out strategies. Of course, one must ensure the language of the governing plan document allows for such actions.

© Copyright 2024 Retirement Learning Center, all rights reserved
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New Cash Out Limit—Mandatory or Not?

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“SECURE Act 2.0 increased the plan cash-out limit to $7,000. Are plans required to apply the new limit?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor in Utah is representative of a common inquiry involving plan cash outs.

Highlights of Discussion
This is a great question because there are several areas of confusion related to plan cash-out provisions. The following addresses the dollar thresholds associated with cash-outs or “mandatory distributions.”

First, qualified retirement plans are not required to have cash-out provisions at all. Internal Revenue Code (IRC) sections 411(a)(11) and 417(e) permit—but do not require—qualified plans to include provisions allowing for the immediate distribution of a separated participant’s vested benefit without the participant’s consent where the present value of the benefit is less than the statutory limit.

Plan sponsors can elect to add a provision to their plans to cash out small, vested benefit amounts up to the statutory limit when a participant terminates. These mandatory distributions can be paid out without the consent of the participant or his/her spouse, if applicable. The statutory limit in recent years has been up to $5,000, but Section 304 of the SECURE Act 2.0 increased the statutory limit to $7,000, effective for 2024 and later years.

Each plan has the option to set its own cash-out threshold within the prescribed limit (anywhere from $0 to $7,000 for 2024 and later years).The threshold must be written into the plan document. So, if a plan has a cash-out provision, the threshold could be any amount up to $7,000. Moreover, the anti-cutback rules do not apply to amendments adding or changing a plan’s cash-out threshold [Treas. Reg. §1.411(d)-4, Q&A-2(b)(2)(v)].

Plans with a cash-out level of less than $1,000 can issue a check for the amount to the participant. Plans that have a cash-out threshold of between $1,000 and the statutory maximum (now $7,000) must automatically roll over the distribution to an IRA established for the former employee, if the former employee does not make an affirmative election to have the amount paid in a direct rollover to an eligible retirement plan or to receive the distribution directly. Notice requirements apply. For additional information please see Notice 2005-5.

Conclusion
Qualified plans are not required to have cash-out provisions, but if they do, the details must be specified in the plan document. Each plan has the option to set its own cash-out threshold within the prescribed limit (anywhere from $0 to $7,000 for 2024 and later years).

© Copyright 2024 Retirement Learning Center, all rights reserved