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Replacing SIMPLE IRAs with a 401(k) – Frequently Asked Questions

Eric Droblyen

January 26, 2023


Over the years, I’ve met with countless small business owners thinking about replacing their current SIMPLE IRA (Savings Incentive Match Plan for Employees) with a new 401(k) plan. During these meetings, the most common questions I receive are:

  • Is a 401(k) plan or a SIMPLE IRA best for my small business?
  • What are the steps for replacing a SIMPLE IRA with a 401(k) plan?
  • Can SIMPLE IRA participants roll their account to the new 401(k) plan?

If you’re a business owner with a SIMPLE IRA today, I’d like to help you answer these questions. In general, this is easily accomplished with some basic education.

Is a 401(k) plan or a SIMPLE IRA best for my small business?

401(k) plans are the most popular employer-sponsored retirement plan in the country, but they’re not always the best fit for a small business. Sometimes, an IRA-based retirement plan – like a SIMPLE IRA – is a superior alternative. While 401(k) plans and SIMPLE IRAs both offer automatic payroll deduction – a convenience feature that makes saving for retirement 15 times more likely – they have little else in common.

To choose the retirement plan that’s best for your company, you should weigh their pros and cons:

401(k) Plans







  • Easy and inexpensive to set up and administer
  • No discrimination testing or Form 5500 requirements
  • Lower employee contribution limits – $15,500 + $3,500 catch-up for 2023
  • Inflexible employer contribution options – limited to 3% matching contribution or 2% nonelective contribution
  • Participant loans not allowed
  • Employer contributions must be 100% immediately vested
  • Employer can’t have another retirement plan
  • Can’t be terminated mid-year

In general, a 401(k) plan is the better choice when higher contribution limits and/or plan design flexibility are needed. When they’re not, a SIMPLE IRA can be an excellent cost-saving alternative. That said, it’s not uncommon for employees (or prospective employees) to view SIMPLE IRAs as inferior to 401(k) plans. This feeling can sometimes be overcome with education, but employee perception is something to consider when choosing between a SIMPLE IRA and 401(k) plan.

High 401(k) Fees

What are the steps for replacing a SIMPLE IRA with a 401(k) plan?

All SIMPLE IRAs operate on a calendar year basis. Replacing one with a 401(k) plan takes some planning due to the following IRS rules:

  • A SIMPLE IRA must be the sole retirement plan in effect for the year.
  • SIMPLE IRAs can’t be terminated mid-year.
  • For a SIMPLE IRA to be terminated at year-end, participants must be notified at least 60 days in advance (November 2).

These rules mean the soonest you can start a new 401(k) plan is the January 1 following the year your SIMPLE IRA is terminated. The process for terminating a SIMPLE IRA involves two steps:

  1. Notify your employees prior to November 2 that the SIMPLE IRA will be terminated at year-end.
  2. Notify your SIMPLE IRA provider that the plan has been terminated and that contributions will cease.

You don’t need to notify the IRS that your SIMPLE IRA plan has been discontinued.

Example: ABC Company decides to terminate their SIMPLE IRA plan on November 30, 2018. The soonest date they make the termination effective is January 1, 2020. ABC Company must notify its employees before November 2, 2019 that their SIMPLE IRA will be discontinued for 2020.

Can SIMPLE IRA participants roll their account to the new 401(k) plan?

Yes, but there is a catch. SIMPLE IRAs are subject to a 2-year rollover rule. For their first two years, SIMPLE IRAs can only be rolled to another SIMPLE IRA. This 2-year period commences on the date that contributions are first made to the SIMPLE IRA. Only once the 2-year period has ended can a SIMPLE IRA be rolled to a 401(k) plan.

Replacing a SIMPLE IRA with a 401(k) takes planning!

I meet business owners all the time that want to start a 401(k) plan immediately, but they can’t due to an existing SIMPLE IRA. This news is usually a surprise.

This surprise is easy to avoid with some basic education. The process for replacing a SIMPLE IRA with a 401(k) plan is not particularly complicated. With a little planning, the process can be smooth and stress-free.

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