If your employer switches retirement plans from a SIMPLE IRA to a 401(k), you’ll have the added benefit of being able to contribute a higher amount to the 401(k) plan. However, during the year of the transition, the contribution limit will be prorated to account for the lower limit typically allowed under SIMPLE IRA plans.
Here’s how to determine the limit that will apply to your 401(k) after the conversion.
How to calculate the 401(k) limit after a SIMPLE IRA conversion
The prorated amount you can contribute to the 401(k) takes into account the standard limits under both a SIMPLE IRA and a 401(k) plan, how long the 401(k) plan is in place, as well as how much you contributed to the SIMPLE IRA so far.
Standard limits
For 2024, the typical annual employee contribution limit for 401(k) plans is $23,000 or 100% of your compensation (whichever is less). Additionally, if you will be 50 years or older by the end of the year, you can defer another $7,500 in 401(k) catch-up contributions.
By contrast, the 2024 SIMPLE IRA limit is $16,000, with an additional $3,500 for catch-up contributions, for businesses that had more than 25 employees in 2023. For businesses that had 25 employees or less in 2023, and for businesses that adopted one of the more generous employer contribution formulas allowed by SECURE 2.0 in 2024, the SIMPLE IRA limit is $17,600 with an additional $3,850 for catch-up contributions.
Prorated limit
The prorated limit on the amount you can contribute to the 401(k) plan only applies during the year of transition between the SIMPLE IRA and the 401(k) plan. The standard 401(k) deferral limit will apply in all subsequent years.
The amount you can contribute to the 401(k) will be determined by calculating the following:
1. Prorated SIMPLE IRA limit: Multiply the 2024 SIMPLE IRA deferral limit, including catch-up contributions, if applicable, by a fraction equal to the number of days the SIMPLE IRA was in effect for that year divided by 365.
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2. Prorated 401(k) limit: Multiply the 2024 401(k) deferral limit, again including catch-up when applicable, by a fraction equal to the number of days the 401(k) was in effect for that year divided by 365.
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3. SIMPLE IRA deferrals: The total deferrals you made to the SIMPLE IRA in the year of transition.
An example of how the limit would apply
Adric’s employer had a SIMPLE IRA plan that they replaced with a safe harbor 401(k), effective October 1, 2024. Adric’s year-to-date deferrals into the SIMPLE IRA was $10,000 and the SIMPLE IRA limit in effect for the plan was $16,000 (the business had more than 25 employees during the prior year). Adric is not old enough to make catch-up contributions.
As a result, Adric’s deferral limit for the 401(k) plan for 2024 is:
1. Prorated SIMPLE IRA limit: $16,000 x (274/365) = $12,010.96
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2. Prorated 401(k) limit: $23,000 x (92/365) = $5,797.26
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3. SIMPLE IRA deferrals: $10,000
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$7,808.22
In the example above, any deferrals contributed during 2024 (whether in the SIMPLE IRA or the 401(k) plan) in excess of $17,808.22 – the $12,010.96 prorated SIMPLE IRA limit plus the $5,797.26 prorated 401(k) limit – must be refunded back to the participant as a corrective distribution.
If a participant does not defer into the SIMPLE IRA at all, they would still be eligible to defer up to $17,808.22 into the 401(k) if they chose.
Where to find your prorated 401(k) limit with Guideline
If your SIMPLE IRA was recently terminated and a Guideline 401(k) was established to replace it, you can find more information about the SIMPLE IRA deferral limit in the supplemental safe harbor notice you received by email. A copy of this notice will also be available in the Resource Library of your dashboard under the “Notices & Disclosures” folder.