Switching From a Simple IRA to a 401(k) Mid-Year: How the Contribution Limit Works

Until recently, employers generally had to wait until January 1 to replace a SIMPLE IRA with a 401(k).

SECURE 2.0 changed that.

An employer can now terminate a SIMPLE IRA during the year and replace it with an eligible safe harbor 401(k).

But there’s a catch: Employees don’t get the full annual SIMPLE IRA limit plus the full annual 401(k) limit in the same year. Instead, the IRS creates a blended contribution limit based on how many days each plan was in effect.

If you’re considering making the switch, here’s what you need to think about.

Why Businesses Move From a SIMPLE IRA to a 401(k)

A SIMPLE IRA can work well when a business is small. But as the company grows, owners often want more from the retirement plan.

A 401(k) can provide access to features such as:

• Higher employee contribution limits
• More flexible employer contribution strategies
• Roth contributions
• Participant loans
• Profit sharing
• Greater flexibility in eligibility requirements for employees

For Oregon employers and others that have a state-sponsored retirement plan mandate, a 401(k) can also satisfy the state’s retirement plan mandate, allowing an employer with a qualifying plan to remain exempt from OregonSaves.

The problem used to be timing.

Generally, replacing an existing SIMPLE IRA meant waiting until the next calendar year.

SECURE 2.0 created a way to make the change during the year.

The Catch: Your Contribution Limit Is Blended

A SIMPLE IRA and a traditional 401(k) have different employee contribution limits.

For 2026, the general limits are:

*Certain SIMPLE plans may qualify for a higher $18,100 limit in 2026.

When an employer switches plans during the year, employees cannot contribute $17,000 to the SIMPLE and then another $24,500 to the 401(k). Instead, the transition-year limit is based on the amount of time each plan was available.

How the Proration Formula Works

The IRS uses a weighted-average calculation based on days.

The basic formula is:

SIMPLE annual limit × percentage of the year the SIMPLE was in effect

+

401(k) annual limit × percentage of the year the 401(k) was in effect

= transition-year contribution limit

Then subtract whatever the employee already contributed to the SIMPLE IRA to determine how much remains available under the new 401(k).

So an employee who isn’t eligible for catch-up contributions could contribute approximately $19,507 total between the two plans in 2026. Not $17,000 plus $24,500. And not the full $24,500 401(k) limit.

What If the Employee Already Contributed to the SIMPLE IRA?

Now suppose that same employee contributed $12,000 to the SIMPLE IRA before the September 1 conversion.

Their approximate remaining 401(k) contribution room would be:

$19,506.85 combined limit

− $12,000 already contributed

= $7,506.85 remaining

That’s why payroll coordination matters during the conversion.

The employer and recordkeeper need to know exactly how much each employee already contributed before the new 401(k) begins.

What About Employees Age 50 or Older?

The same basic concept applies to catch-up-eligible employees.

For 2026, the standard age-50 catch-up amounts are:

The catch-up amount is incorporated into the annual limit before applying the day-count calculation.

Using our September 1 example:

If the employee had already contributed $14,000 to the SIMPLE IRA:

$24,843.84

− $14,000

= approximately $10,843.84 remaining for the 401(k)

What about employees ages 60–63?

SECURE 2.0 also provides a larger catch-up limit for employees who turn 60, 61, 62 or 63 during the year.

For 2026:

• The enhanced SIMPLE catch-up is $5,250
• The enhanced 401(k) catch-up is $11,250

Those amounts need to be incorporated into the applicable transition-year calculation for an eligible employee.

What Employers Need to Do to Make the Switch

A mid-year SIMPLE-to-401(k) conversion isn’t simply a matter of opening a new account.

Several pieces need to line up.

1. Establish an eligible replacement 401(k)

The mid-year exception applies when the SIMPLE IRA is replaced with an eligible safe harbor 401(k) arrangement. This is different from simply terminating the SIMPLE and starting any traditional 401(k) you want.

2. Give employees advance notice

Employees must generally receive notice of the SIMPLE IRA termination at least 60 days before the termination date.

The notice must explain that salary reduction contributions to the SIMPLE will stop after the termination and address the employer contributions that will still be made through the termination date.

3. Coordinate payroll

This may be the most important operational step. Before the new 401(k) begins, determine for each employee:

• SIMPLE contributions already made
• The employee’s applicable transition-year limit
• Remaining 401(k) contribution capacity
• Whether the employee qualifies for catch-up contributions

That information needs to make it into payroll correctly.

4. Communicate the transition-year limit

Don’t simply tell employees that the 2026 401(k) limit is $24,500. For someone who participated in the SIMPLE IRA earlier in the year, that isn’t their available 401(k) contribution room. The transition-year limit is employee-specific based on the applicable formula and prior contributions.

What Happens to the Money Already in the SIMPLE IRA?

Employees don’t lose the money already accumulated in their SIMPLE IRA.

SECURE 2.0 also provides special rollover relief in connection with these transitions.

Normally, distributions from a SIMPLE IRA during an employee’s first two years of participation are subject to special rollover restrictions.

For a qualifying mid-year SIMPLE-to-401(k) transition, certain distributions can instead be rolled into the replacement 401(k), subject to the applicable requirements.

This is another area where the transition should be coordinated with the plan’s recordkeeper and administrator rather than handled informally.

Is Switching Mid-Year Worth It?

Potentially. The transition year is more complicated because employees operate under a blended contribution limit. But that’s a one-year issue. Once the employer reaches the next full calendar year, employees can generally take advantage of the normal annual limits under the 401(k).

For a growing business that has outgrown its SIMPLE IRA, that can mean access to:

• Higher contribution opportunities
• More flexible employer contributions
• Better plan-design options
• Roth contributions
• Profit sharing
• Additional features that aren’t available under a SIMPLE IRA

So the question isn’t simply whether a mid-year conversion creates additional administration. The better question is:

Does waiting until January 1 mean spending another year in a retirement plan your business has already outgrown?

Planning a SIMPLE IRA to 401(k) Conversion

If you’re considering switching from a SIMPLE IRA to a 401(k), the timing affects both plan design and how much employees can contribute during the transition year.

Before choosing an effective date, determine:

• Which SIMPLE contribution limit applies to your current plan
• How much employees have already contributed
• The transition-year contribution limits
• Which safe harbor 401(k) design fits the business
• How payroll and employee notices will be handled

Independent Retirement works with businesses throughout Oregon and Southwest Washington and beyond to design and administer retirement plans and manage transitions like these.

Explore our 401(k) plan options or learn more about safe harbor 401(k) plans.

Schedule a retirement plan consultation and we’ll walk through the timing, plan design and contribution limits for your business.