10.2 Employee Salary Reduction Contributions and SECURE 2.0 Higher Limits

Mechanics of Employee Salary Reduction Contributions

A SIMPLE IRA permits eligible employees to make elective deferrals through regular payroll deductions pursuant to a salary reduction agreement. Under IRC § 408(p)(2)(A)(i), an employee may elect to have the employer contribute a specified percentage of their compensation or a specific fixed dollar amount per pay period to their SIMPLE IRA.

Statutory Definition of Compensation

For SIMPLE IRA contribution purposes, compensation is defined under IRC § 408(p)(6)(A):

• W-2 Employees: Compensation includes total wages, tips, and other compensation subject to federal income tax withholding under IRC § 3401(a), plus all pre-tax elective deferrals made by the employee (including contributions to 401(k), 403(b), 457(b), SIMPLE plans, and Section 125 cafeteria plans). In operational terms, this corresponds to Box 1 wages from Form W-2 plus elective deferral amounts.
• Self-Employed Individuals: Compensation equals net earnings from self-employment derived under IRC § 1402(a), after deducting the deduction for one-half of self-employment taxes under IRC § 164(f).

Employee Election Rights and Administrative Rules

During the statutory 60-day election window (November 2 through December 31), eligible employees may enter into a new salary reduction agreement or modify an existing agreement for the upcoming calendar year. In addition:

• An employee may modify their salary reduction percentage during the year if the employer's plan document provides for additional election periods (e.g., quarterly or semi-annually).
• An employee may stop making salary reduction contributions at any time during the year. Under IRC § 408(p)(5)(B), an employer cannot restrict an employee's right to cease contributions.
• If an employee discontinues salary reduction contributions mid-year, the plan document may specify that the employee cannot resume deferrals until the beginning of the next calendar year, unless the plan provides for more frequent mid-year entry windows.

Statutory Contribution Limits (2024–2026)

Under IRC § 408(p)(2)(E), the maximum employee elective deferral is subject to annual cost-of-living adjustments (COLAs) indexed in $500 increments:

• Tax Year 2024: $16,000
• Tax Year 2025: $16,500
• Tax Year 2026: $17,000 (IRS Notice 2025-67)

Standard Catch-Up Contributions for Age 50 and Older

Under IRC § 414(v), participants who attain age 50 or older by the end of the calendar year are eligible to make additional catch-up contributions:

• Tax Year 2024: $3,500 (total contribution potential: $19,500)
• Tax Year 2025: $3,500 (total contribution potential: $20,000)
• Tax Year 2026: $4,000 (total contribution potential: $21,000)

SECURE 2.0 Section 117: Higher Limits for Small Employers

Section 117 of the SECURE 2.0 Act of 2022 enacted a major structural enhancement effective for taxable years beginning after December 31, 2023 (tax year 2024 onward), designed to narrow the disparity between SIMPLE IRA limits and traditional 401(k) limits:

Employers with 25 or Fewer Employees (Automatic 10% Increase)

For an employer sponsoring a SIMPLE IRA that had 25 or fewer employees who received at least $5,000 in compensation for the preceding calendar year, and that did not maintain a qualified plan for substantially the same employees during the 3 years before it first maintained the SIMPLE IRA (IRC § 408(p)(2)(E)(iv); Notice 2024-2, Q&A E-1):

• The annual elective deferral limit and the catch-up contribution limit automatically increase by 10% over the standard statutory caps.
• 2024 Limits (≤ 25 Employees):
  • Regular Deferral Limit: $17,600 (110% of $16,000)
  • Standard Catch-Up Limit: $3,850 (110% of $3,500)
  • Total Combined Potential for Age 50+: $21,450
• 2025 Limits (≤ 25 Employees):
  • Regular Deferral Limit: $17,600 (the 110% amount is fixed from the 2024 base and then indexed on its own, so it did not change for 2025)
  • Catch-Up Limit: $3,850
  • Total Combined Potential for Age 50+: $21,450
• 2026 Limits (≤ 25 Employees):
  • Regular Deferral Limit: $18,100
  • Catch-Up Limit: $3,850
  • Total Combined Potential for Age 50+: $21,950
• Employers in this category do not need to take any formal action or increase employer contributions to unlock these higher limits.

Employers with 26 to 100 Employees (Conditional 10% Increase)

For employers with 26 to 100 employees who received at least $5,000 in compensation in the preceding year:

• The standard limits ($16,500 in 2025; $17,000 in 2026) apply by default.
• However, the employer may affirmatively elect to offer the higher limits ($17,600 in 2025; $18,100 in 2026) to its employees IF the employer provides an enhanced employer contribution:
  • A 4% dollar-for-dollar matching contribution (instead of the standard 3% match); OR
  • A 3% non-elective contribution for all eligible employees (instead of the standard 2% non-elective contribution).
• The employer must make this formal election and notify employees prior to the annual 60-day election window.

SECURE 2.0 Section 109: Enhanced Catch-Up for Ages 60, 61, 62, and 63

Section 109 of the SECURE 2.0 Act established an innovative catch-up tier effective for taxable years beginning after December 31, 2024 (calendar year 2025 onward):

• Target Demographics: Applies exclusively to participants who attain age 60, 61, 62, or 63 during the taxable year.
• Statutory Formula: The catch-up limit for eligible participants is equal to the greater of:
  • $5,000 (indexed for inflation); OR
  • 150% of the regular catch-up limit in effect for that plan year.
• Application to Standard SIMPLE Plans in 2025:
  • Standard 2025 catch-up limit = $3,500.
  • 150% of $3,500 = $5,250.
  • Total allowable contribution for a participant age 60–63 in a standard SIMPLE plan in 2025 = $16,500 + $5,250 = $21,750.
• Application to Section 117 Plans:
  • The statute measures the age 60–63 amount against the regular SIMPLE catch-up, and the IRS publishes a single SIMPLE amount: $5,250 for 2025 and 2026 (IRS Notice 2025-67). It replaces the $3,850 catch-up for these ages.
  • Total allowable contribution for a participant age 60–63 in a Section 117 plan = $17,600 + $5,250 = $22,850 for 2025 and $18,100 + $5,250 = $23,350 for 2026.
• Age Cliff at Age 64: When a participant reaches age 64, their allowable catch-up contribution drops back to the standard age 50+ catch-up limit ($3,500 in 2025; $4,000 in 2026). This age-specific bracket is a critical testing point on the CISP examination.

Comprehensive Limit Summary: 2024 Through 2026

2024 Section 117 limits were $17,600 and $3,850. Note that for 2026 the standard catch-up ($4,000) is higher than the Section 117 catch-up ($3,850), which the IRS left unchanged.

Aggregation of Salary Reductions under IRC § 402(g)

An employee's elective deferrals to a SIMPLE IRA are aggregated with elective deferrals made to other employer plans under IRC § 402(g):

• If an individual works for two unrelated employers during the calendar year—Employer A sponsoring a SIMPLE IRA and Employer B sponsoring a traditional 401(k) plan—the individual is subject to the overall IRC § 402(g) annual limitation ($23,500 in 2025; $24,500 in 2026).
• Deferrals to the SIMPLE IRA cannot exceed the SIMPLE limit ($17,000 in 2026), and combined deferrals across both plans cannot exceed the § 402(g) limit ($24,500 in 2026).
• Excess deferrals must be corrected by allocating the excess to one of the plans and distributing the excess plus net income attributable (NIA) by April 15 of the following year to avoid double taxation.

Department of Labor (DOL) Deposit Timing Rules

Employee salary reductions are legally considered plan assets from the moment they can reasonably be separated from the employer's general corporate funds. The Department of Labor strictly enforces contribution remittance deadlines under Title I of ERISA.

The Statutory Rule: 29 CFR § 2510.3-102(b)(2)

Under DOL Regulation 29 CFR § 2510.3-102(b)(2), an employer must deposit employee salary reduction contributions into each employee's SIMPLE IRA:

• As of the earliest date on which the contributions can reasonably be segregated from the employer's general assets; but
• In no event later than the 30th calendar day following the end of the month in which the amounts would otherwise have been payable to the employee in cash (withholding month).

Crucial CISP Exam Comparison: SIMPLE IRA vs. 401(k) Rules

Candidates frequently confuse SIMPLE IRA deposit timing with qualified plan rules:

• Qualified 401(k) Plans: General rule requires deposit as soon as segregated, with an outside limit of the 15th business day of the month following withholding. For small plans (<100 participants), a formal safe harbor permits deposit within 7 business days following payroll.
• SIMPLE IRA Plans: Must be deposited as soon as segregated, with an outside limit of 30 calendar days following the end of the month in which payroll occurred. That outside date is only a backstop; the governing standard is the earliest date the money can reasonably be segregated from the employer's assets.

Consequences of Late Remittance

If an employer fails to deposit salary reductions by the statutory deadline:

1. The late funds represent an impermissible use of plan assets and a prohibited extension of credit under IRC § 4975.
2. The employer becomes liable for lost investment earnings, which must be calculated and remitted to participant accounts using the DOL Online Calculator or IRS correction methodologies.
3. The employer must file IRS Form 5330 (Return of Excise Taxes Related to Employee Benefit Plans) and pay a 15% first-tier excise tax on the amount involved (generally the interest or lost earnings on the late deposits, not the full deferral) for each year the violation remains uncorrected.

Bank Operational Scenario: Remittance Auditing and Compliance Correction

A regional bank's retirement plan operations group monitors a portfolio of commercial clients utilizing Form 5305-SIMPLE. On November 5, 2024, the bank's automated compliance engine flags an anomaly for client Vantage Logistics (18 employees). Vantage Logistics processed payroll on September 13 and September 27, withholding $6,400 in employee elective deferrals, but did not transmit the funds to the bank until November 4, 2024.

The bank's CISP operations specialist evaluates the timeline:

• For amounts withheld during September 2024, the outside statutory deadline under 29 CFR § 2510.3-102(b)(2) was October 30, 2024 (30 calendar days following the September 30 month-end).
• Remitting funds on November 4 breached the statutory deadline by 5 calendar days, creating a prohibited transaction under IRC § 4975.
• The specialist contacts Vantage Logistics' controller and outlines the mandatory remediation:
  1. Vantage must calculate lost earnings on the $6,400 from October 30 to November 4 and deposit those earnings directly into employee SIMPLE IRAs;
  2. Vantage must file IRS Form 5330 for tax year 2024, self-reporting the late deposit and remitting the 15% excise tax on the prohibited extension of credit;
  3. The specialist assists the controller in configuring automated ACH debits tied directly to payroll processing dates, ensuring future remittances occur within 3 business days of payroll, well ahead of the 30-day month-end ceiling.