Back in June, we discussed the various qualified retirement plans available to small businesses. Those articles caused some of our clients to consider switching from a SIMPLE IRA to another retirement option like a 401(k) or Cash Balance Plan.
As we discussed in our earlier blogs, there are pros and cons to each of the qualified retirement plans available. Although a SIMPLE IRA is certainly a viable option, let’s look at why you might feel it’s no longer the right qualified retirement plan for your company.
What’s the problem with a SIMPLE IRA?
The potential shortcomings of the plan are found in the restrictions that appear in the IRS regulations:
- Exclusivity—if you sponsor a SIMPLE IRA, you cannot have another qualified plan in the same year. Many business owners find that a combination of qualified retirement plans offers an attractive opportunity in their retirement planning; it isn’t an option if you have a SIMPLE IRA.
- Company Size—the SIMPLE IRA is available only to companies with fewer than 100 employees. There are no exceptions. With a booming economy, you can conceivably quickly outgrow the plan.
- Significant Penalty—with most retirement plans, if you withdraw money before you reach retirement age (59½), you will have to pay a 10 percent early distribution penalty. With a SIMPLE IRA, that penalty jumps to 25 percent of the balance if withdrawn in the first two years of the employee’s participation in the plan.
- Portability—if an employee leaves the company within the first two years, he or she can’t rollover the funds into the new employer’s 401(k), for example, without paying the 25 percent penalty. After two years, the early withdrawal penalty is 10 percent.
How to terminate a SIMPLE IRA plan?
- You must maintain the SIMPLE IRA plan through the entire calendar year, regardless of your fiscal year. That means you can’t terminate a plan you have today until the end of 2018 and you must continue to fund it as promised in the employee notice through the end of this year.
- Prior to November 2nd, you must notify your employees that you are discontinuing the SIMPLE IRA plan effective the following January 1st. You must notify your employees at least 60 days in advance—if you wait until November 3rd or later of this year, you won’t be able to terminate the plan until January 1, 2020.
- Prior to the end of the year, notify your plan’s financial institution and payroll provider that you won’t be making SIMPLE IRA contributions for the next calendar year and that you want to terminate your contributions.
- Keep dated records of everything you do regarding the termination, but you don’t have to notify the IRS that you have terminated your SIMPLE IRA plan.