What’s a SIMPLE IRA? A Small Business Guide to Retirement Plans

SIMPLE IRA stands for Savings Incentive Match Plan for Employees, and it’s a retirement account designed for small businesses. Employees contribute by deducting a portion of their salary, and employers must match that contribution up to a certain percentage of the employee’s compensation.

If you want to provide retirement benefits for your employees but don’t have the budget or administrative staff to run a larger retirement program, a SIMPLE IRA might be a good option for you. 

In this guide, we’ll explore what a SIMPLE IRA is, how it works, and whether it’s right for your business. 

How Does a SIMPLE IRA Work? 

A SIMPLE IRA is a benefit that helps employees build their retirement savings. First, you’ll need to establish the plan with the IRS by completing Form 5304-SIMPLE(opens in a new tab) or Form 5305-SIMPLE(opens in a new tab). You can either partner with a designated financial institution to manage the accounts or allow employees to choose their own financial institution. 

Once you set up the accounts, employees contribute by electing to deduct a portion of their paychecks. As an employer, you must also contribute a percentage that matches the employee’s contribution. The exact contribution amount will depend on your company’s size and the SIMPLE IRA structure you choose. 

Employees are always 100% vested in their SIMPLE IRA accounts. This means they have immediate ownership of all contributions from the beginning of the account with no waiting period. They can withdraw from their SIMPLE IRA starting at age 59½. While employees can withdraw earlier, they’ll face early withdrawal penalties. 

The administrative responsibilities for a SIMPLE IRA are relatively minimal when compared to a 401(k) or other retirement plans. Here’s what you’ll need to do: 

• Make the appropriate salary deductions and match employee contributions as part of your payroll process. 

• Provide an annual notice to employees before November 2nd that outlines their contribution, match, and account transfer options. Employees then have until December 31st to make adjustments to their plan. 

• Keep your FORM 5304-SIMPLE or Form 5305-SIMPLE up to date with current IRS regulations.

What Are the SIMPLE IRA Contribution Rates?

SIMPLE IRA contribution rates and limits vary. In 2026, the SIMPLE IRA maximum contributions for employees amount to $17,000 across the whole calendar year. 

Organizations with fewer than 25 employees may allow a higher contribution limit of $18,100. Employers with 26 to 100 employees may also allow this limit if they make 4% matching contributions. 

Catch-up contributions let employees exceed this ceiling: Employees over the age of 50 can contribute an additional $4,000 to help their retirement savings catch up. Older employees (age 60 through 63) can make catch-up contributions of up to $5,250 due to the SECURE 2.0 Act(opens in a new tab). 

Contribution rates for employers don’t follow the same rules. Here are the two methods employers use to contribute to SIMPLE IRA:

• Matching contributions: Employers must match the employee’s contributions up to 3% of the person’s compensation. This increases to 4% for organizations with 26 to 100 employees allowing the $18,100 contribution limit. 

• Nonelective contributions: Employers must contribute 2% of the employee’s compensation to the SIMPLE IRA, regardless of whether or not the employee contributes to their account. Employers with 26 to 100 employees allowing the $18,100 employee contribution limit must make nonelective contributions of 3%. 

Exact contributions amounts and rules for SIMPLE IRAs can change from year to year. For example, employee contribution limits usually increase each year due to cost of living adjustments. Review the current IRS guidance on a regular basis to make sure your team stays compliant. 

What Businesses and Employees Are Eligible for a SIMPLE IRA?

You must meet a few specific eligibility requirements to offer SIMPLE retirement accounts to your employees. To provide these plans, you must: 

• Have 100 or fewer employees who earned $5,000 or more in compensation during the previous calendar year. 

• Not offer any other retirement plans for employees, including 401(k)s or other employer-sponsored IRA types. 

If your company already offers SIMPLE IRA plans but grows beyond the 100-employee limit, you have a two-year grace period to switch to another retirement plan. 

Employees also must meet certain eligibility requirements to use a SIMPLE IRA. Specifically, employees are eligible if they’ve earned $5,000 in compensation from your business in two previous calendar years, and if they expect to receive $5,000 from your business during the current calendar year. The previous earning years do not have to be consecutive. 

Employers can choose to make the eligibility requirements less strict. For example, a business owner may eliminate the $5,000 rule so more workers can opt into the program. But keep in mind that employers can’t increase the minimum earning requirements.

You can also exclude employees if they’re covered by a union agreement that includes retirement benefits. If you operate internationally, you can also exclude any nonresident alien employees that do not receive any US-sourced earned income. 

Eligibility requirements for SIMPLE IRAs can change annually. Be sure to verify guidance for the current year on the IRS website or ask a tax professional before getting started.

SIMPLE IRA vs. 401(k): What’s the Difference? 

A SIMPLE IRA and a 401(k) are both employer-sponsored plans that help employees save for retirement. They’re both offered as company benefits, and both employers and employees make contributions. However, these two retirement savings plans have very different structures, regulations, and contribution limits. 

In general, SIMPLE IRAs are designed for small businesses, while 401(k)s work for a wider range of companies. When building your employee benefits strategy, you’ll need to assess both options and decide which one is the best fit for your business. 

Here are some of the key differences between SIMPLE IRAs and 401(k) plans:

What Should Employers Consider Before Setting Up a SIMPLE IRA?

SIMPLE IRAs are a great benefit option, but you’ll need to make sure it fits your business before committing. Here’s what to consider: 

• Eligibility requirements: Do you meet the requirement of 100 employees or less? 

• Cost of required employer contributions: How would the required matching or nonelective contributions affect your budget? 

• Contribution limits: Are the contribution limits enough for your employees, or would they prefer a higher-contribution plan? 

• Administrative work: Do you have the right infrastructure and enough staff to handle a retirement plan’s admin responsibilities? 

• Flexibility: Is a SIMPLE IRA flexible enough for your business’s needs? Would you prefer more control over contributions and vesting? 

• Expected growth: Do you expect your business to grow beyond 100 employees in the near future? Is it possible you may need a different retirement plan to meet employee expectations? 

In addition to these questions, it’s also helpful to review the current IRS requirements and have discussions with possible account providers before making a final decision. 

Support Your Growing Team With Justworks

A SIMPLE IRA is a great starting benefit. But as your business grows, you may want to offer 401(k)s. The SECURE 2.0 Act allows a mid-year rollover to a 401(k) in some circumstances.

No matter which angle you take, Justworks is here to help. We support small businesses where they are but prepare them for future growth. Justworks PEO handles your business’s payroll and benefits and provides consistent HR support. And if you opt for a 401(k) down the road, set it up directly with Justworks through Empower. 

Get started with Justworks today to see how we can help strengthen your employee benefits program. 

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.

FAQ

How Is a SIMPLE IRA Different From a Traditional or Roth IRA?

A SIMPLE IRA is an employer-sponsored retirement plan designed for small businesses. Traditional and Roth IRAs are both individual retirement plans people can set up on their own without employer contributions. 

What’s a SIMPLE Roth IRA vs. a SIMPLE IRA?

Due to changes enacted in the SECURE 2.0 Act, SIMPLE IRA programs can now have a Roth option. With a traditional SIMPLE IRA, employee contributions are tax-deductible, but withdrawals are taxed in retirement. With a SIMPLE Roth IRA, contributions happen after tax and are not tax-deductible, but withdrawals are tax-free in retirement. 

Can a Self-Employed Business Owner Establish a SIMPLE IRA? 

Yes, a self-employed business owner can set up a SIMPLE IRA. SIMPLE IRAs are generally available to any business with less than 100 employees. 

Can an Employer Change Their SIMPLE IRA Contribution Method? 

Yes, an employer can change its SIMPLE IRA contribution method at the beginning of the calendar year. They must notify employees at least 60 days prior to the change. 

What Happens to an Employee’s SIMPLE IRA When They Leave the Company? 

When an employee leaves a company with a SIMPLE IRA, they have a few options. They can either leave the money in the account, roll it over to another retirement account, or cash out with early withdrawal penalties. Account rollover options vary depending on how long the account has been active.