It’s hard to believe, but we are quickly approaching the midpoint of 2019, which means it’s the perfect time of year to have retirement plan conversations with your clients or prospects because two important plan sponsor deadlines will also be here before they know it.
Oct. 1 is the deadline to establish either a Safe Harbor 401(k) or a SIMPLE IRA plan and still have the benefit available for 2019. After the Oct. 1 deadline, these options won’t be available again until Jan. 1, 2020.
The other deadline is for companies that currently sponsor a SIMPLE IRA plan. Nov. 1 is the date that notices need to be distributed if the client intends to move from a SIMPLE IRA plan to a Safe Harbor 401(k) plan. SIMPLE IRA plans have an exclusivity rule, so once they are started for the following year, they must stay in place until the beginning of the next year.
Why Switch From A SIMPLE IRA To A Safe Harbor 401(k) Plan?
- Higher Deferrals Limits for Owners and Family Members. The 2019 limits are $13,000 for SIMPLE IRAs and $19,000 for 401(k) plans. Individuals older than 50 can defer an additional $3,000 in a SIMPLE IRA and $6,000 more in a 401(k) plan. Rea’s retirement plan services team is happy to prepare a cost/benefit analysis to illustrate whether or not it makes sense for your client to consider a switch for 2020.
- Roth 401(k). This is a substantial differentiator when comparing a SIMPLE IRA to a 401(k). With the Roth 401(k) option, participants contribute after paying tax, so distributions will be tax-free in retirement. With a SIMPLE IRA plan, there is no choice but pretax deferrals. We have seen a large increase in owners who want Roth as part of their retirement planning, especially younger business owners. Another thing to note, with a Roth 401(k), there are no required minimum distributions at age 70½.
- Cost. If you have a SIMPLE IRA plan that has been in place for a number of years, and you are able to capture a significant amount of assets and roll them into a new 401(k) plan, you can significantly decrease investment expense in many cases.
- Retirement Plan Leakage. This is another major distinguishing factor. SIMPLE IRA plans have no guardrails when it comes to distributions. An employee can literally withdraw money, including the company matching contribution, the day after deposits hit their account. A 401(k) plan can put restrictions on how and when an employee can take out money. Even if a 401(k) plan allows for loans, the participant is required to pay the money back into the plan. This ensures that the retirement plan does as it is intended – help save for retirement. Both loans and hardship withdrawals are optional features that an employer can choose to offer with their 401(k) plan.
Making the switch from a SIMPLE IRA plan to a Safe Harbor 401(k) plan is easily accomplished. While SIMPLE IRA plans are a little cheaper to administer, there are a few more factors to keep in mind if you are considering making the switch. Highly skilled workers tend to be more attracted to 401(k) plans over the SIMPLE IRA. In addition, the 401(k) offers more flexibility and options, which is likely why they also have higher contribution rates and balances. With SIMPLE IRA plans, employers can’t offer another retirement plan nor can they make a contribution other than the required non-elective or matching contribution.
If you have clients that you would like to discuss, please reach out to a member of our Rea retirement plan services team. We are happy to provide you with a complimentary analysis to compare the SIMPLE IRA and Safe Harbor 401(k) plan for your client(s) and/or prospective clients.
By: Steve Renner, QKA (New Philadelphia office)