How Does SECURE 2.0’s Mid-Year Termination of SIMPLE IRAs Work?

Q: The SECURE 2.0 Act of 2022 now allows a mid-year termination of a SIMPLE IRA and replacement with a safe harbor 401(k) plan. I understand the 25% early distribution tax will not apply to distributions from a terminated SIMPLE IRA within the first two years of participation if the distributed assets are rolled into a new 401(k) or 403(b) plan, and the rollover contributions are then subject to the distributable events permitted in the 401(k) or 403(b) plan. Do these distribution rules apply to all IRA rollovers from the SIMPLE IRA or only for participants that had not yet met the two-year participation requirement?

Kimberly Boberg, Kelly Geloneck, Emily Gerard and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

A: Great question! You are correct that Section 332 of SECURE 2.0 waives the limitation on rollovers from a SIMPLE IRA within two years of initial participation by providing an exception to the 25% additional tax if an employer “terminates the qualified salary reduction arrangement of a SIMPLE IRA plan and establishes a 401(k) plan or 403(b) plan.” Such rolled over amounts are then subject to the distributable events set out in section 401(k)(2)(B) or 403(b)(11), as applicable, for participants within that initial two-year period. However, as this provision is merely an exception to the tax for new participants, the general distribution rules for rollover contributions likely continue to apply to rollovers by participants who are outside that two-year participation window. See IRS Notice 2024-2(G-4).

NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.

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