SIMPLE IRA
A SIMPLE IRA (Savings Incentive Match Plan for Employees Individual Retirement Account) is a type of retirement savings plan designed for small employers and their employees, allowing salary reduction contributions from employees and mandatory matching or nonelective contributions from employers to individual retirement accounts.[1] Established under the Small Business Job Protection Act of 1996, it provides a simplified, low-cost alternative to more complex retirement plans like 401(k)s, with no annual IRS filing requirements for employers.[2] Eligible employers include those with up to 100 employees who earned at least $5,000 in compensation during any two preceding calendar years, encompassing for-profit businesses, self-employed individuals, tax-exempt organizations, and governmental entities.[1] Employees eligible to participate are those expected to receive at least $5,000 in compensation for the current year and who met the $5,000 threshold in any two prior years, with employers able to impose a one-year waiting period for new hires.[1] For 2025, the standard employee deferral limit is $16,500 on a pre-tax basis (or Roth after-tax basis if elected), increased to $18,150 for employers with 25 or fewer eligible employees under SECURE 2.0; standard catch-up contributions are an additional $3,500 for those aged 50 or older ($3,850 for small employers), or [$5,250](/page/3) (5,775 for small employers) for those aged 60 to 63. For employers with 26 to 100 employees, higher limits are available if they provide enhanced contributions (4% match or 3% nonelective).[3][4] Employers must either match employee deferrals dollar-for-dollar up to 3% of the employee's compensation (or 1% to 3% for up to two out of five years with advance notice) or make a nonelective 2% contribution on behalf of each eligible employee, based on compensation up to $350,000.[3] These contributions are tax-deductible for employers and grow tax-deferred until withdrawal, when distributions are taxed as ordinary income, subject to a 10% early withdrawal penalty before age 59½ (increased to 25% if withdrawn within the first two years of participation).[1] To establish a SIMPLE IRA, employers must notify eligible employees by November 2 of the prior year (or 60 days before the plan year for new plans), adopt a written plan agreement using IRS Form 5304-SIMPLE or 5305-SIMPLE, and set up individual SIMPLE IRAs at a financial institution by the plan's effective date, typically January 1.[2] The plan operates on a calendar-year basis only and cannot be terminated mid-year, though employers may switch to another plan type after year-end.[1] Key benefits include tax advantages that encourage retirement savings, ease of administration without fiduciary responsibilities, and portability, as funds can be rolled over to other IRAs or qualified plans upon job change or plan termination.[5]Overview
Definition and Purpose
A SIMPLE IRA, or Savings Incentive Match Plan for Employees, is a type of individual retirement account (IRA) designed specifically for small employers to facilitate retirement savings for their employees and themselves.[2] It functions as a set of individual IRAs established at financial institutions chosen by employees, with the employer sponsoring the plan by making required contributions to those accounts.[6] The primary purpose of a SIMPLE IRA is to enable small businesses—typically those with 100 or fewer employees earning at least $5,000 in the prior year—to offer a straightforward retirement plan that encourages employee participation through tax advantages and employer matching incentives.[7] By simplifying administration compared to more complex plans, it promotes tax-deferred growth on combined employer and employee contributions, allowing savings to accumulate without immediate taxation.[1] Key benefits include low setup and maintenance costs, the absence of annual IRS filing requirements such as Form 5500, and portability for employees, who can roll over their balances to other eligible retirement accounts after a two-year holding period.[2][8] This structure supports small employers in providing retirement benefits while offering employees flexible, individually managed savings options.History and Legislation
The SIMPLE IRA was established under the Small Business Job Protection Act of 1996 (Public Law 104-188), signed into law on August 20, 1996, to offer small employers a streamlined retirement plan alternative with reduced administrative requirements compared to traditional qualified plans.[9] This legislation targeted businesses with 100 or fewer employees, allowing for easy setup using individual retirement accounts held at financial institutions.[10] The plans became effective for taxable years beginning on or after January 1, 1997.[11] Key legislative updates have since refined the SIMPLE IRA's structure and benefits. The Pension Protection Act of 2006 (Public Law 109-280) made permanent the higher contribution limits phased in by the Economic Growth and Tax Relief Reconciliation Act of 2001, raising the employee deferral limit to $10,000 (with annual indexing for inflation thereafter) and permitting automatic enrollment features to boost participation. The SECURE Act of 2019 (Public Law 116-94) increased the required minimum distribution (RMD) age for SIMPLE IRAs from 70½ to 72, applying to individuals who attain age 70½ after December 31, 2019, thereby allowing longer tax-deferred growth. Further enhancements came via the SECURE 2.0 Act of 2022, incorporated into the Consolidated Appropriations Act, 2023 (Public Law 117-328). This law enabled employees to designate salary deferral contributions to SIMPLE IRAs as Roth contributions on an after-tax basis, effective for contributions made after December 31, 2022. It also introduced enhanced catch-up contributions for individuals aged 60 to 63, set at the greater of $5,000 or 150% of the standard catch-up amount, beginning with taxable years after December 31, 2024. Additionally, employers gained flexibility to terminate a SIMPLE IRA plan mid-year—previously prohibited—provided they replace it with a qualified 401(k or 403(b plan and issue at least 30 days' notice to participants, effective for plan years beginning after December 31, 2023. The IRS adjusts SIMPLE IRA contribution limits annually based on cost-of-living adjustments (COLA) under Internal Revenue Code section 408(p)(2)(E). For 2025, the salary deferral limit rose to $16,500 from $16,000 in 2024, with the standard catch-up contribution remaining at $3,500 for those age 50 and older (subject to the enhanced provision for ages 60-63).Eligibility and Setup
Employer Eligibility
Eligible employers for a SIMPLE IRA plan include any business, self-employed individual, tax-exempt organization, or governmental entity that had 100 or fewer employees who each received at least $5,000 in compensation during the preceding calendar year.[11] This employee count encompasses all individuals, including part-time workers, regardless of whether they are eligible to participate in the plan.[12] An employer is ineligible to establish a SIMPLE IRA if it currently maintains another qualified retirement plan, such as a 401(k or SEP, covering the same group of employees, except in cases involving collective bargaining agreements or certain business acquisitions.[11] Additionally, eligibility is barred if the employer maintained such a qualified plan with contributions made or benefits accrued for substantially the same employees during any of the three taxable years immediately preceding the year the SIMPLE IRA is adopted.[12] Once a SIMPLE IRA plan is established, no annual employee count test is required to maintain it, even if the number of employees grows beyond 100.[1] However, if the employer exceeds the 100-employee limit, it must provide notification to employees at least 60 days before the end of the calendar year stating that the plan will terminate at year-end unless the limit is satisfied, allowing a two-year grace period for continuation in some cases.[12][1] Sole proprietors and partners in partnerships qualify as eligible employers and are treated as both employer and employee for plan purposes.[11] Their contributions to the plan on their own behalf are considered employer contributions and are subject to the applicable limits.[11]Employee Eligibility
To participate in a SIMPLE IRA plan, employees must meet specific compensation-based criteria established by the Internal Revenue Service (IRS). An employee is eligible if they received at least $5,000 in compensation from the employer during any two preceding calendar years—whether consecutive or not—and are reasonably expected to receive at least $5,000 in compensation during the current calendar year.[2] This threshold ensures broad access for long-term employees while allowing employers to adopt less restrictive standards, such as a $3,000 minimum, to include more participants if desired.[1] Self-employed individuals with net earnings from self-employment are also considered eligible under these rules.[11] SIMPLE IRA plans require universal availability, meaning employers must extend participation opportunities to all eligible employees without additional restrictions or discrimination testing.[2] Unlike more complex retirement plans, there is no need for nondiscrimination testing, as the plan design inherently promotes equitable access for eligible workers.[1] Employees who qualify cannot be excluded based on factors like age, part-time status, or other criteria beyond the compensation requirements, fostering inclusivity for small business workforces.[11] Certain employees may be excluded from a SIMPLE IRA plan. These include nonresident aliens who have no U.S.-sourced wages, salaries, or other compensation, as well as employees covered under a collective bargaining agreement where retirement benefits were the subject of good-faith bargaining between the employer and union.[2] Additionally, specific groups like air pilots or flight engineers covered under Title II of the Railway Labor Act may be excluded if their retirement benefits are addressed through other means.[1] These exclusions are narrowly defined to align with federal labor and tax regulations. Entry into a SIMPLE IRA plan typically occurs through an annual salary reduction election period, generally spanning 60 days ending on December 31, during which eligible employees can choose their contribution levels.[11] Under provisions enhanced by the SECURE 2.0 Act of 2022, employers may implement automatic enrollment, deducting a fixed percentage or amount from an employee's wages for contributions unless the employee affirmatively opts out or selects a different rate.[2] This opt-out mechanism promotes higher participation rates while preserving employee choice.[13]Establishing the Plan
Employers can establish a SIMPLE IRA plan without obtaining prior approval from the Internal Revenue Service (IRS), making the process straightforward compared to other retirement plans. To outline the plan's terms, employers adopt IRS Form 5304-SIMPLE, which allows each employee to select their own financial institution to serve as trustee for their individual SIMPLE IRA, or Form 5305-SIMPLE, which permits the employer to designate a single financial institution to provide prototype SIMPLE IRAs for all participating employees. These forms serve as the basic plan document and must be completed and signed by the employer before the plan's effective date; no formal filing with the IRS is required.[2][1] A key requirement in establishing the plan is providing timely notifications to eligible employees. At least 60 days before the start of the 60-day salary reduction election period—typically beginning on November 2 and ending on December 31—employers must furnish each eligible employee with a written summary of the plan. This summary must include details on employee participation rules, contribution limits, the type of employer contributions (matching or nonelective), procedures for modifying or terminating salary reduction elections, and participants' rights to withdraw contributions within the first two years without incurring the additional 25% tax penalty. For employees who become eligible after the initial notification, the summary must be provided within 30 days of their eligibility date. The signed Forms 5304-SIMPLE or 5305-SIMPLE can satisfy this summary requirement if they contain the necessary information.[1][14] The timeline for setting up a SIMPLE IRA plan offers flexibility for most employers. Plans can be established at any time from January 1 through October 1 to be effective for the current calendar year, provided notifications are issued timely; for new employers formed after October 1, the plan can be set up as soon as administratively feasible. Once established, the plan remains in effect for the entire calendar year and cannot be terminated mid-year. Employer contributions for the year must be made by the due date of the business's federal income tax return, including extensions, while employee salary reduction contributions are due within 30 days after the end of the month in which they are withheld.[1][2] Administratively, establishing a SIMPLE IRA involves selecting a qualified financial institution, such as a bank or insurance company, to hold the individual IRAs, either by the employer or by allowing employee choice depending on the form used. Employers bear the responsibility of ensuring that SIMPLE IRA accounts are opened for each participating employee and that contributions are deposited correctly and on time, but they hold no fiduciary duty regarding the investment options within the IRAs, as employees retain full ownership and control over their accounts. This structure minimizes administrative burdens, enabling small businesses to implement the plan with relative ease.[2][1]Contributions
Employee Contributions
Employees make salary reduction contributions to a SIMPLE IRA by electing to defer a percentage of their compensation, which is withheld from their paychecks through payroll deduction and deposited directly into their individual SIMPLE IRA accounts. This election allows employees to contribute any percentage of their pay, subject to plan terms, and can be made or modified during the annual election period, typically from November 2 to December 31, or at other times as permitted by the employer.[2][1] Under the SECURE 2.0 Act, effective for plan years beginning after December 31, 2022, employees may designate their salary reduction contributions as Roth contributions, which are made on an after-tax basis but allow for tax-free qualified withdrawals in retirement. This Roth option is elective and requires employees to specify the treatment before the contributions are made, providing flexibility in tax planning without altering the underlying deferral mechanism. Employers are not required to offer this feature but must amend plans and notify employees if implemented. Additionally, employers may elect to designate matching or nonelective contributions as Roth contributions under the same provisions.[15] Salary reduction contributions are typically made ratably throughout the year via ongoing payroll deductions, though plans may allow for year-end contributions; regardless, employers must deposit these amounts timely, within 30 days after the end of the month in which the compensation would otherwise have been payable to the employee. This ensures prompt funding of the accounts while aligning with standard payroll cycles. Employer matching contributions, if applicable, are calculated based on these employee deferrals.[2][1] Unlike certain qualified retirement plans, SIMPLE IRAs do not permit loans to participants, treating any such withdrawal as a taxable distribution subject to applicable penalties. This restriction maintains the plan's simplicity and aligns with general IRA rules prohibiting borrowing against account balances.[16]Employer Contributions
Employers sponsoring a SIMPLE IRA plan must choose one of two contribution options to provide benefits to eligible employees, as required under Internal Revenue Code Section 408(p).[11] The first option is a matching contribution, where the employer contributes an amount equal to 100% of the employee's salary reduction contributions up to the first 3% of the employee's compensation.[1] This matching applies only to employees who make elective deferrals into the plan, similar to the deferral process outlined for employee contributions. Employers may elect to reduce the matching rate to 1% for no more than 2 out of any 5 consecutive calendar years, provided they notify all eligible employees within a reasonable period of time before the 60-day election period for the year.[11] The second option is a nonelective contribution of 2% of each eligible employee's compensation, regardless of whether the employee elects to defer any salary.[1] This benefits all eligible employees, including non-participants, and is calculated based on compensation up to the annual limit of $350,000 for 2025.[3] Unlike some other retirement plans, no year-end true-up is required for nonelective contributions as long as they are made evenly throughout the year in proportion to compensation paid.[11] Additionally, under the SECURE 2.0 Act, effective for taxable years beginning after December 31, 2023, employers may make optional additional nonelective contributions of up to the lesser of 10% of the employee's compensation or $5,100 per eligible employee for 2025.[11]Contribution Limits and Deadlines
For 2025, the maximum employee elective deferral to a SIMPLE IRA is $16,500.[3] Employees aged 50 and older may make an additional catch-up contribution of $3,500, bringing their total deferral limit to $20,000.[3] Under the SECURE 2.0 Act, individuals aged 60 to 63 qualify for an enhanced catch-up contribution of $5,250, resulting in a total deferral limit of $21,750 for that group.[3] Employer contributions are subject to specific caps tied to employee compensation. For matching contributions, employers may contribute up to 100% of the employee's deferral, not exceeding 3% of the employee's compensation for the year.[2] Nonelective contributions, if chosen instead of matching, are limited to 2% of each eligible employee's compensation, with compensation considered up to $350,000 for 2025.[3] This caps the maximum nonelective contribution at $7,000 per employee.[1] The overall annual addition to a participant's SIMPLE IRA, including both employee and employer contributions, cannot exceed $70,000 under Internal Revenue Code Section 415(c), though this limit is rarely approached in SIMPLE plans due to the lower deferral caps.[3] Contribution deadlines ensure timely funding while aligning with tax reporting. Employee elective deferrals must be deposited into the SIMPLE IRA no later than 30 days after the end of the month in which the amounts would otherwise have been payable to the employee.[1] Employer matching or nonelective contributions for a given calendar year must be made by the due date of the employer's federal income tax return, including any extensions—typically April 15 or October 15 of the following year.[1] For self-employed individuals sponsoring a SIMPLE IRA, the same tax return deadline applies.[17] If deadlines are missed, employers may correct the error through the IRS Employee Plans Compliance Resolution System (EPCRS), which provides programs for self-correction or IRS approval to avoid plan disqualification.| Contribution Type | 2025 Limit | Key Notes |
|---|---|---|
| Employee Elective Deferral | $16,500 | Excludes catch-up; based on compensation. |
| Catch-Up (Age 50+) | $3,500 | Standard amount; added to base deferral. |
| Enhanced Catch-Up (Ages 60-63) | $5,250 | Per SECURE 2.0; replaces standard catch-up. |
| Employer Matching | Up to 3% of compensation | Matches deferral; max aligns with deferral limit. |
| Employer Nonelective | 2% of compensation (up to $350,000) | Max $7,000; alternative to matching. |
| Total Annual Addition (IRC 415(c)) | $70,000 | Includes all contributions; rarely binding in SIMPLE IRAs. |