SIMPLE IRA

A SIMPLE IRA is an individual retirement plan funded through a salary reduction arrangement that only a small employer may offer, and the employer is required to contribute as well as the employee. The Code calls it a simple retirement account and defines it by reference to the conditions it has to meet: the term “simple retirement account” means an individual retirement plan, as defined in section 7701(a)(37), with respect to which the requirements of paragraphs (3), (4), and (5) are met, and with respect to which the only contributions allowed are contributions under a qualified salary reduction arrangement, subject to a carve-out for rollover contributions made after the two-year period described in section 72(t)(6) (26 U.S.C. 408(p)(1), 2024 edition).

SIMPLE stands for Savings Incentive Match Plan for Employees. The acronym is a name, not a description of the paperwork.

Only a Small Employer May Offer One

The gate is a headcount measured on the prior year, and it is measured by compensation rather than by headcount alone. The term “eligible employer” means, with respect to any year, an employer which had no more than 100 employees who received at least $5,000 of compensation from the employer for the preceding year (26 U.S.C. 408(p)(2)(C)(i)(I), 2024 edition).

Growing past the limit does not end the plan immediately. An eligible employer who establishes and maintains a plan under this subsection for one or more years and who fails to be an eligible employer for any subsequent year shall be treated as an eligible employer for the two years following the last year the employer was an eligible employer (26 U.S.C. 408(p)(2)(C)(i)(II), 2024 edition).

That grace period has an exception, and dropping it is the easy error. If such failure is due to any acquisition, disposition, or similar transaction involving an eligible employer, the preceding sentence shall not apply (26 U.S.C. 408(p)(2)(C)(i)(II), 2024 edition). A firm that crossed the line by buying another business does not get the two years.

The Employer Must Contribute, and There Are Two Ways

This is the feature that separates a SIMPLE IRA from a plan the employee funds alone. The default is a match. The employer is required to make a matching contribution to the simple retirement account for any year in an amount equal to so much of the amount the employee elects as does not exceed the applicable percentage of compensation for the year (26 U.S.C. 408(p)(2)(A)(iii), 2024 edition), and except as provided in subclause (IV) the term “applicable percentage” means 3 percent (26 U.S.C. 408(p)(2)(C)(ii)(I), 2024 edition).

The alternative replaces the match entirely. An employer shall be treated as meeting the matching requirement for any year if, in lieu of the contributions described in that clause, the employer elects to make nonelective contributions of 2 percent of compensation for each employee who is eligible to participate in the arrangement and who has at least $5,000 of compensation from the employer for the year (26 U.S.C. 408(p)(2)(B)(i), 2024 edition).

Note the difference in who is covered. The match reaches only employees who elect to defer, because it matches what they elected. The 2 percent nonelective contribution reaches every eligible employee with at least $5,000 of compensation, whether or not that employee put in a dollar.

Choosing the nonelective route carries a notice duty. If an employer makes an election under this subparagraph for any year, the employer shall notify employees of such election within a reasonable period of time before the 60-day period for such year (26 U.S.C. 408(p)(2)(B)(i), 2024 edition).

The Match Percentage Can Be Lowered, With Two Limits On It

An employer may elect to apply a lower percentage, not less than 1 percent, for any year for all employees eligible to participate in the plan for such year if the employer notifies the employees of that lower percentage within a reasonable period of time before the 60-day election period for such year (26 U.S.C. 408(p)(2)(C)(ii)(II), 2024 edition).

The second limit is a frequency cap and it is the half that gets dropped. An employer may not elect a lower percentage under this subclause for any year if that election would result in the applicable percentage being lower than the applicable percentage in more than 2 of the years in the 5-year period ending with such year (26 U.S.C. 408(p)(2)(C)(ii)(II), 2024 edition).

The Larger Small Employer Pays More

A separate rule raises both percentages for one class of employer, and it turns on the same headcount idea at a lower number. In the case of an employer which had more than 25 employees who received at least $5,000 of compensation from the employer for the preceding year, and which makes the election under subparagraph (E)(i)(II) for any year, the 2 percent nonelective figure is applied for such year by substituting “3 percent” (26 U.S.C. 408(p)(2)(B)(iii), 2024 edition), and the 3 percent applicable percentage is applied for such year by substituting “4 percent” (26 U.S.C. 408(p)(2)(C)(ii)(IV), 2024 edition).

Both substitutions carry the same two conditions, more than 25 employees at the $5,000 compensation level in the preceding year and the election under subparagraph (E)(i)(II). Neither condition alone is enough.

The Deferral Ceiling Is Written as a Structure, Not a Number

The amount which an employee may elect for any year is required to be expressed as a percentage of compensation and may not exceed a total of the applicable dollar amount for any year (26 U.S.C. 408(p)(2)(A)(ii), 2024 edition).

The applicable dollar amount is then built from a base figure and a multiplier rather than stated once. It is $10,000 in any other case, and it is the adjusted dollar amount in two situations, in each of which the statute qualifies the employer as one “described in clause (iii)”: an eligible employer described in clause (iii) which had not more than 25 employees who received at least $5,000 of compensation from the employer for the preceding year, and an eligible employer described in clause (iii) which is not described in that first subclause and which elects, at such time and in such manner as prescribed by the Secretary, the application of the second subclause for the year (26 U.S.C. 408(p)(2)(E)(i), 2024 edition). The adjusted dollar amount is an amount equal to 110 percent of the dollar amount in effect under the any-other-case subclause for calendar year 2024 (26 U.S.C. 408(p)(2)(E)(ii), 2024 edition).

A separate condition on being a described employer sits in the following clause, and it is quoted here as its own rule rather than resolved into the cross-reference above, because the cross-reference points at the cost-of-living clause on the face of the text. An eligible employer is described in that clause only if, during the 3-taxable-year period immediately preceding the first year the employer maintains the qualified salary reduction arrangement, neither the employer nor any member of any controlled group including the employer, or any predecessor of either, established or maintained any plan described in clause (i), (ii), or (iv) of section 219(g)(5)(A) with respect to which contributions were made, or benefits were accrued, for substantially the same employees as are eligible to participate in that arrangement (26 U.S.C. 408(p)(2)(E)(iv), 2024 edition).

Both figures are indexed, on different base periods. The $10,000 amount is adjusted at the same time and in the same manner as under section 415(d), with the base period taken into account being the calendar quarter beginning July 1, 2004, and any increase which is not a multiple of $500 rounded to the next lower multiple of $500 (26 U.S.C. 408(p)(2)(E)(iii)(I), 2024 edition). For a year beginning after December 31, 2024 the adjusted dollar amount is adjusted annually in that same manner, except that the base period taken into account is the calendar quarter beginning July 1, 2023 (26 U.S.C. 408(p)(2)(E)(iii)(II), 2024 edition).

The live figure for any given year comes from the annual IRS announcement rather than from the Code, so a ceiling quoted from memory is a stale ceiling. The structure above is what does not change.

Who Has to Be Let In

The participation test looks backwards and forwards at once, and both limbs bind. The requirements are met for a year only if all employees of the employer who received at least $5,000 in compensation from the employer during any 2 preceding years, and are reasonably expected to receive at least $5,000 in compensation during the year, are eligible to make the election or receive the nonelective contribution (26 U.S.C. 408(p)(4)(A), 2024 edition).

An employer may elect to exclude from that requirement employees described in section 410(b)(3) (26 U.S.C. 408(p)(4)(B), 2024 edition).

Everything vests at once. The requirements are met if the employee’s rights to any contribution to the simple retirement account are nonforfeitable (26 U.S.C. 408(p)(3), 2024 edition). There is no vesting schedule to run.

It Has to Be the Employer’s Only Plan

An arrangement shall not be treated as a qualified salary reduction arrangement for any year if the employer, or any predecessor employer, maintained a qualified plan with respect to which contributions were made, or benefits were accrued, for service in any year in the period beginning with the year such arrangement became effective and ending with the year for which the determination is being made (26 U.S.C. 408(p)(2)(D)(i), 2024 edition).

The Deposit Deadlines and the Election Window

Employee money has the tighter clock. An employer must make the elective employer contributions not later than the close of the 30-day period following the last day of the month with respect to which the contributions are to be made, and must make the matching or nonelective contributions not later than the date described in section 404(m)(2)(B) (26 U.S.C. 408(p)(5)(A), 2024 edition).

Each employee eligible to participate may elect, during the 60-day period before the beginning of any year, and the 60-day period before the first day that employee is eligible to participate, to participate in the arrangement, or to modify the amounts subject to the arrangement, for that year (26 U.S.C. 408(p)(5)(C), 2024 edition). An employee may elect to terminate participation at any time during the year, except that the arrangement may provide that an employee who does so may not elect to resume participation until the beginning of the next year (26 U.S.C. 408(p)(5)(B), 2024 edition).

The Two-Year Rule on Withdrawals

A distribution taken early out of a SIMPLE IRA can carry a heavier charge than the same distribution from another IRA. A special rule applies to a distribution received from a SIMPLE IRA during the 2-year period beginning on the date on which the taxpayer first participated in the employer’s SIMPLE IRA plan, and under it, if the additional income tax on early distributions applies to a distribution within that 2-year period, the rate of additional tax is increased from 10 percent to 25 percent (IRS, Retirement plans FAQs regarding SIMPLE IRA plans).

The exceptions still work. If one of the exceptions to application of the early distribution tax under section 72(t) applies, for example for amounts paid after age 59 and a half, after death, or as part of a series of substantially equal payments, the exception also applies to distributions within the 2-year period and the 25-percent additional tax does not apply (IRS, Retirement plans FAQs regarding SIMPLE IRA plans).

Where this account sits among the other tax-favoured wrappers is in tax-advantaged account, and the distributions that eventually have to come out of it are in required minimum distribution.

Common Questions

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