29.3 SIMPLE IRAs & Small-Employer Contribution Choices

The small-employer arrangement

A Savings Incentive Match Plan for Employees (SIMPLE) IRA combines employee salary reductions with required employer contributions. It generally is available to an employer with 100 or fewer employees who received at least $5,000 of compensation in the preceding calendar year, subject to the applicable rules. A SIMPLE generally cannot coexist with another employer plan for the same year unless a statutory exception applies. It is not just a smaller SEP with fully discretionary employer funding.

An employee generally must be eligible if the employee received at least $5,000 in compensation during any two preceding calendar years and is reasonably expected to receive at least $5,000 in the current year. The employer may use less restrictive thresholds. Review permitted exclusions and common-control rules rather than excluding employees because they work part time or have not completed two consecutive full years.

Employee deferral limits in 2025

The ordinary SIMPLE salary-reduction limit is $16,500 for 2025. Certain employers and plans qualify for the higher $17,600 limit under SECURE 2.0. The higher amount does not arise by multiplying the current ordinary limit by 110% and rounding independently; use the applicable published 2025 limit. A participant's actual allowed amount also depends on compensation and other plan contributions subject to the individual's aggregate limits.

The ordinary age-50 catch-up is $3,500 for 2025, with a $3,850 catch-up for certain enhanced-limit arrangements. For someone attaining age 60, 61, 62, or 63 during 2025, a permitted higher catch-up is $5,250 instead. Apply one appropriate catch-up category; do not stack all three. Plan terms must permit the applicable contribution.

Employers with 25 or fewer employees can generally use the enhanced limits under the applicable statute. An eligible employer with 26–100 employees can elect the enhanced treatment with increased employer contributions, generally a 4% match or 3% nonelective contribution instead of the ordinary 3% match or 2% nonelective arrangement. Confirm the statutory employee-count and plan requirements before selecting the enhanced amount.

Ordinary employer contribution alternatives

Under the standard SIMPLE rules, the employer generally chooses between:

1. A dollar-for-dollar matching contribution up to 3% of employee compensation; or
2. A 2% nonelective contribution for eligible employees, whether or not they elect to defer salary.

The ordinary matching percentage can be reduced within the statutory limits, generally no lower than 1% and for no more than two years of the five-year period ending with the reduction year, with required employee notice. This is not a general right to skip contributions during a loss year. The enhanced-limit provisions and other special rules must be checked separately.

Example: An employee earns $50,000 and defers $6,000 under a standard 3% matching arrangement. The employer matches $1,500, not $6,000, because the 3% cap applies. If the same employee defers only $500, the match generally is $500. Under a 2% nonelective arrangement, the employer generally contributes $1,000 even if that employee elects no salary reduction.

For the 2% nonelective calculation, the annual compensation limit applies; for 2025 it generally is $350,000. The standard matching contribution uses its applicable compensation rules. Do not assume every contribution formula uses an identical capped wage base. SIMPLE IRA contributions generally are immediately vested.

Establishment, notices, and deposits

An existing employer generally establishes a SIMPLE IRA between January 1 and October 1 for that year, with special rules for new employers. Employees receive required information and an opportunity to make or change salary-reduction elections. Adoption, election, and funding deadlines serve different purposes: timely filing the income-tax return does not retroactively create a missing employee election.

Employee salary reductions must be deposited promptly under the applicable tax and labor rules. Publication 560 describes a tax deadline of 30 days after the end of the month for which contributions are made, while Department of Labor rules can require earlier transmission for plans subject to them. Employer matching and nonelective contributions generally are due by the employer return's due date, including extensions. Do not hold withheld employee money until the employer's income-tax extension expires.

Traditional salary reductions generally reduce current federal income-tax wages but remain subject to Social Security, Medicare, and FUTA as applicable. Roth SIMPLE contributions, where permitted, have different income-tax treatment. Use the plan's actual election rather than assuming all deferrals are pre-tax.

Distribution trap

A taxable early distribution from a SIMPLE IRA can carry a 25% additional tax during the first two years of participation rather than the ordinary 10%, unless an exception applies. Transfers and rollovers also have special first-two-year restrictions. These rules concern distributions from the employee's account and do not change the employer's contribution percentage. A worker leaving employment retains ownership of vested SIMPLE IRA funds, but leaving does not itself make a distribution tax-free.

Official references

2025 Publication 560 and Notice 2024-80, checked October 17, 2026. The notice establishes $17,600 for qualifying enhanced 2025 arrangements; do not substitute the $18,100 figure applicable to 2026.