July 2, 2025

SIMPLE IRA Plan

What is it?

If you are self-employed or own a small business, you may be able to establish a savings incentive match plan for employees (SIMPLE) IRA plan. A SIMPLE IRA plan is a salary reduction retirement plan for certain small businesses that is established in the form of employee-owned traditional individual retirement accounts (but with a higher contribution level). To qualify, you can’t maintain another employer-sponsored retirement plan and must have no more than 100 employees who were employed in the past year and who earned at least $5,000. The SIMPLE IRA plan is funded with voluntary employee contributions and mandatory matching or nonelective contributions by the employer. Establishing such a retirement plan can provide you with a tax-advantaged way to save funds for your retirement; it may also help you attract and retain qualified employees.

The SIMPLE IRA effectively replaces the SAR-SEP, which can only be used by employers who established a SAR-SEP before 1997.

Even though government employers generally can’t sponsor 401(k) plans, they (along with tax-exempt employers) can sponsor SIMPLE IRA plans, as long as they meet the 100-employee test described above.

How much can an employee defer?

Eligible employees may defer up to $16,500 of their wages to the plan in 2025 in either pre-tax or Roth contributions. In addition, employees age 50 and older can make an additional catch-up contribution of $3,500 in 2025. Employees who reach age 60, 61, 62, or 63 in 2025 can make a catch-up contribution of $5,250. These limits are indexed for inflation. The employee contributions are excludable from the employees’ income, although they are subject to payroll taxes under the Federal Insurance Contributions Act (FICA), Federal Unemployment Tax Act (FUTA), and Railroad Retirement Act (RRA).

The annual contribution and catch-up limits for employers with 25 or fewer employees are $17,600; $21,450 for employees age 50 and older; $22,850 for employees who reach age 60 to 63 in 2025. Employers with 26-100 employees may use the higher limits as long as they provide either a 4% matching contribution or a 3% nonelective contribution.

Definition of eligible employees

Employees (including self-employed individuals) are eligible if they have earned at least $5,000 from the employer during any two preceding years (whether or not consecutive) and are expected to earn at least $5,000 in the current year. Eligibility does not depend upon an employee’s age or how many hours the employee worked for the employer. However, employees don’t have to be included if they are under a collectively bargained agreement where retirement benefits were the subject of good-faith bargaining. Nonresident aliens who receive no earned income from the employer from sources within the United States can be excluded as well.

An employer may, at its discretion, lower the $5,000 threshold to include more employees.

Must the employer contribute to the plan?

As an employer, you must make either a matching contribution or a nonelective contribution every year that you maintain the plan using one of two contribution formulas. (No other employer contributions to the SIMPLE IRA plan are permitted.)

A matching contribution must equal the amount (if any) that each employee chooses to contribute up to a maximum of 3% of the employee’s annual compensation. You may reduce the 3% match to as little as 1% in any two of five consecutive years. (There are special employee notification requirements if you reduce the 3% contribution level.) There is no limit on the amount of employee compensation taken into account when applying this matching contribution formula.

If you choose to make a nonelective contribution, you must make a contribution of 2% of annual compensation for each eligible employee, even for those employees who choose not to contribute to the plan. For this purpose, no more than $350,000 (in 2025) of an employee’s annual compensation is taken into account. So the maximum nonelective contribution for any employee in 2025 is $7,000 (2% of $350,000).

Employers may make additional nonelective contributions to each employee of the plan in a uniform manner, provided the contributions do not exceed 10% of compensation or $5,100 (in 2025), whichever is less.

How do SIMPLE IRAs compare with SIMPLE 401(k)s and traditional 401(k)s?

Despite the similarities the SIMPLE IRA shares with the SIMPLE 401(k), there are significant differences between these two retirement vehicles. In particular, the SIMPLE 401(k) is more difficult to administer than the SIMPLE IRA and offers less flexibility. The following table shows some of the differences between traditional 401(k) plans, SIMPLE 401(k) plans, and SIMPLE IRAs.

	Traditional 401(k)	SIMPLE 401(k)	SIMPLE IRA
Number of employees	Any number of employees	100 or fewer employees earning at least $5,000	100 or fewer employees earning at least $5,000
Maximum deferral	$23,500 in 2025 ($31,000 if age 50 or older; $34,750 if age 60 to 63)	$16,500 in 2025 ($20,000 if age 50 or older; $21,750 if age 60 to 63)Higher limits may apply to certain plans	$16,500 in 2025 ($20,000 if age 50 or older; $21,750 if age 60 to 63)Higher limits may apply to certain plans
Required employer contribution	None, unless plan is top-heavy, or is a safe harbor plan, or includes qualified automatic contribution arrangement (QACA)	Dollar-for-dollar match up to 3% of pay, or 2% of pay for all eligible participants; pay for both limited to $350,000 in 2025	Dollar-for-dollar match up to 3% of pay, or 2% of pay (up to $350,000 in 2025) for all eligible participants (3% of pay match may be reduced to as little as 1% in any two of five years)
Vesting schedule	For employer contributions only	No, all contributions 100% vested	No, all contributions 100% vested
ADP/ACP discrimination testing?	Yes [unless safe-harbor plan, or includes qualified automatic contribution arrangement (QACA)]	No	No
Roth contributions permitted?	Yes	Yes	Yes
Early withdrawal penalty	10%	10%	25% first two years of participation, then 10%
Withdrawal of employee pre-tax contributions	Restricted	Restricted	Unrestricted
Excludable employees	under age 21less than one year of servicecertain collectively bargained employees, nonresident aliens, and other classes of employees	under age 21less than one year of servicecertain collectively bargained employees, nonresident aliens, and other classes of employees	employees who have not earned at least $5,000 in any two prior years, or who are not expected to earn at least $5,000 in the current yearcertain collectively bargained employees and nonresident aliens
Federal reporting by employer	Same as other qualified plans	Same as other qualified plans	None
May the employer have other plans?	Yes	No	No
May the plan include an automatic contribution arrangement?	Yes	Yes	Yes
Are loans allowed?	Yes	Yes	No

Who can establish a SIMPLE IRA?

If you have 100 or fewer employees and don’t maintain another employer-sponsored retirement plan, you can establish a SIMPLE IRA whether you’re self-employed or have a qualified small business.

Self-employed

If you are self-employed, with or without employees, you can set up a SIMPLE IRA for yourself and make contributions to the plan. You are considered to be self-employed if you are in business for yourself or you are a sole proprietor or partner. Self-employment income can include part-time work. If you receive a Form 1099-MISC for work you performed as an independent contractor, you probably have self-employment income.

Qualified small business

You may also set up a SIMPLE IRA if you have 100 or fewer employees who were employed at any time in the past year and who earned at least $5,000. The number of employees is figured on an aggregate calendar-year basis, rather than on an average daily basis. For instance, say you employed 97 employees earning over $5,000 in January. Two months later, 7 employees left and were replaced by 7 other employees receiving over $5,000. You would not qualify as a small employer. That’s because you would have employed a total of 104 employees during the year who earned $5,000 or more.

See Questions & Answers, below, for more information about the 100-employee limit.

The term “employer” includes corporations, partnerships, sole proprietorships, and other trades or businesses under common control (whether incorporated or not). For instance, if you operate both a computer rental agency and a computer repair business as sole proprietorships, the employees from both businesses would be counted together to determine if you have more than 100 employees.

Can’t maintain another employer-sponsored retirement plan

You may not set up a SIMPLE IRA if you maintain, during any part of the calendar year, any other employer-sponsored retirement plan [such as a 401(k) plan or a simplified employee pension plan] for which contributions are made or benefits are accrued for the calendar year.

If you maintain a qualified plan for collective bargaining employees, you are permitted to maintain a SIMPLE IRA plan for other employees.

What are some advantages of a SIMPLE IRA?

The SIMPLE IRA plan is exempt from the nondiscrimination rules that usually govern qualified plans

The SIMPLE IRA plan is not required to follow certain Internal Revenue Code rules that prohibit discrimination in favor of higher-paid workers. As a result, the following are true:

A minimum number of employees is not required to participate in the plan
The plan does not have to maintain a specific ratio of contributions by non-highly-compensated employees to contributions by highly compensated employees
Top-heavy plan requirements do not apply

Therefore, even if no employees want to contribute, you may establish a plan, contribute on your own behalf, and provide an employer matching contribution.

You aren’t required to file reports with the government

Only the financial institution holding the IRAs is required to file reports with the government. You are required only to report employees’ contributions on their W-2 forms. In addition, you must check the pension plan box on the employee’s W-2.

You have limited fiduciary responsibility

Once your employees exercise control over the assets in their accounts, you are relieved of any fiduciary responsibility.

An employee is considered to have exercised control when:

The employee has made an affirmative election on how to invest the contributions (i.e., the employee has selected the financial institution for his or her SIMPLE IRA)
The employee has rolled over the account to another SIMPLE IRA (for more details on when and how this can be done, see Questions & Answers), or
The employee’s SIMPLE IRA has been established for one year

The contribution limit for a SIMPLE IRA is more than the amount allowed for a traditional IRA

In 2025, an employee may make an elective contribution of up to $16,500. The limit is generally expressed as a percentage of compensation, unless you permit employees to express the contribution as a dollar amount. These amounts are significantly higher than the contribution limits for a traditional IRA ($7,000 in 2025; $1,000 in catch-up contributions).

An employee who has several jobs with different employers and participates in several plans can’t make total elective deferrals in excess of $23,500 in 2025, plus allowable catch-up contributions. Elective deferrals to 401(k) plans, 403(b) plans, SIMPLEs, and SAR-SEPs are included in this overall limit, but deferrals to Section 457(b) plans are not.

Employer contributions can be flexible

You can change your employer contribution annually. That is, each year, you can decide whether you want to provide a matching contribution or a nonelective contribution.

The plan requires minimal paperwork

The IRS has developed Forms 5304-SIMPLE and 5305-SIMPLE, which are model forms for setting up plans. These forms can also satisfy employer notification requirements (i.e., they can provide necessary information about the plan to your employees).

Pre-tax dollars are contributed and grow tax deferred

Whether you’re making contributions for only yourself, or for yourself and your employees, your business can deduct contributions made to a SIMPLE IRA. The dollars invested are pre-tax dollars and accrue tax deferred. That means that your employees can exclude the contributions from their gross income.

Rollovers are permitted

Income-tax-free rollovers or direct trustee-to-trustee transfers can be made from one SIMPLE IRA to another SIMPLE IRA.

A rollover from a SIMPLE IRA to a traditional IRA, another qualified plan, or a 403(b) plan or Section 457 plan can be made tax free only after you’ve participated in the SIMPLE IRA for at least two years.

SIMPLE IRA plans may offer more protection from creditors than regular IRAs in the event of bankruptcy

Funds held in a SIMPLE IRA plan are generally fully shielded from an employee’s creditors under federal law in the event of the employee’s bankruptcy. This is in contrast to traditional and Roth IRA funds, which are generally protected only up to $1,512,350 under federal law [plus any amounts attributable to a rollover from an employer qualified plan or 403(b) plan]. (Traditional and Roth IRAs may also have additional creditor protection under state law.) This amount is scheduled for adjustment in April 2025.

What are some drawbacks of establishing a SIMPLE IRA?

You’re required to make a contribution every year

Even if your business is doing poorly in a given year, you must make a contribution (either matching or nonelective) to the plan. In contrast, some other retirement plans (e.g., a profit-sharing plan) can give you year-to-year discretion regarding whether you want to contribute and how much.

Your employees are vested immediately

Your employees do not have to be employed for a certain number of years before they have full ownership of employer contributions. In other words, employees are immediately 100% vested in employer contributions. Conversely, with a 401(k), you can require employees to remain employed for a certain period of time before they are fully vested in employer contributions.

The SIMPLE IRA might not be a good choice if your goal is to induce employees to remain with your company. Furthermore, immediate vesting can be extremely costly if you have high turnover.

You’re not allowed to maintain any other employer-sponsored retirement plans

In general, you can’t maintain a SIMPLE plan if you maintain any other plan for which contributions are made or benefits are accrued for your employees during any part of the calendar year. Consequently, the SIMPLE IRA will not be the appropriate plan if you want to maintain two or more benefit plans, especially when you have groups of employees with different plan needs.

The annual employee deferral is limited

Highly compensated employees and business owners who are hoping to save considerable money for retirement may find the annual deferral amount limiting. Under certain other employer-sponsored retirement plans, you might be able to contribute considerably more than you can in a SIMPLE IRA.

Early withdrawals may result in significant penalties

Distributions from a SIMPLE IRA are generally subject to the regular IRA rules. So, if you make a withdrawal before age 59½, you’ll be subject to the 10% premature penalty tax (unless you meet one of the exceptions).

If you make a withdrawal from a SIMPLE IRA before participating in the plan for two years, you may be hit with a 25% (rather than 10%) penalty tax for pre-age 59½ withdrawals.

SIMPLE IRA plans may offer less protection from creditors than regular IRAs outside of bankruptcy

Many states have enacted legislation specifically protecting IRA assets from creditors. These laws clearly apply to IRAs that an employee establishes outside of a SIMPLE IRA plan. However, there is some question whether these laws apply to SIMPLE IRAs. The reason for the ambiguity is that SIMPLE IRA plans are generally considered “pension plans” for purposes of the Employee Retirement Income Security Act of 1974 (ERISA). While SIMPLE IRA plans are exempt from most of ERISA’s provisions, they are covered by ERISA’s preemption rules. These rules preempt (that is, render inapplicable) all state laws that “relate to” ERISA plan benefits. It is possible, then, that state laws that provide SIMPLE IRA plans with protection from creditors are preempted by ERISA. If this is the case, then SIMPLE IRAs would be fully protected from creditors under federal law in the event of bankruptcy, but would have no protection from creditors under state law outside of bankruptcy. If creditor protection is important to you, be sure to consult a qualified professional before establishing a SIMPLE IRA plan. Note: if your SIMPLE IRA plan covers only you (or you and your spouse), then your plan is not subject to ERISA, and your SIMPLE IRA should be entitled to any creditor protection your state’s laws provide.

Qualified employer plans subject to ERISA generally provide full protection from an employee’s creditors, regardless of whether the employee has filed for bankruptcy. (Some exceptions apply. For example, qualified domestic relations orders and IRS liens.)

How do you establish a SIMPLE IRA?

Establish a SIMPLE IRA at the appropriate time of the year

If you’re an existing employer who did not previously maintain a SIMPLE IRA plan, you may establish a plan effective on any date between January 1 and October 1.
If you previously maintained a SIMPLE plan, you may establish a new plan effective only on January 1. You don’t need to establish a new plan every year — only when you want to change your plan (for example, when you decide to change your designated financial institution or change employee participant requirements).
If you are a new employer and you came into existence after October 1, you may establish a plan as long as you do it as soon as “administratively possible” after the start of the business.

Set up a plan document and give eligible employees notice of the plan before the beginning of the annual enrollment period

Although you can establish a SIMPLE IRA by using any document that satisfies the statutory requirements, you’ll probably find it easier to use one of the model forms created by the IRS. If you want to allow employees to choose the financial institution that will receive their contributions to their SIMPLE IRAs, you can use IRS Form 5304-SIMPLE. If you’re setting up all of the IRAs in the same place, you can use IRS Form 5305-SIMPLE. Both forms contain a model plan, employee notification information, and a salary reduction agreement. The notice also must include a summary plan description prepared by the SIMPLE IRA trustee.

Provide employees at least 60 days to elect whether or not to contribute to the plan

Every eligible employee must have the right to elect to make a salary reduction contribution for a year or modify a previous election during the 60-day period before the start of each calendar year (i.e., November 2 to December 31 of the preceding year). For the first year an employee becomes eligible to make contributions, the election can be made during the 60-day period that includes either the date the employee becomes eligible or the day before the date.

Employees establish their individual SIMPLE IRAs prior to the date contributions must be made under the plan

Each employee completes either Form 5305-S (Individual Retirement Trust Account) or Form 5305-SA (SIMPLE Individual Retirement Custodial Account).

If you have an employee who refuses or is unable to establish a SIMPLE IRA account, you may do so on the employee’s behalf at a financial institution of your choosing.

What are the federal income tax considerations?

Employers can deduct their contributions to a SIMPLE IRA

As an employer, you can deduct from business income your matching or nonelective contributions to employees. Deduct your contributions in the tax year for the calendar year in which they are made. If you do not use a calendar year, contributions are deductible for the tax year that includes the end of the calendar year for which contributions are made.

You can deduct contributions for a particular tax year if they are made for that tax year and are made by the due date (including extensions) of your federal income tax return for that year.

Contributions are excluded from income and accounts accrue tax deferred

Both your matching or nonelective contributions and the employees’ salary reduction contributions are excludable by the employee for federal income tax purposes, and earnings on the contributions grow tax deferred. The employees’ contributions, but not your matching or nonelective contributions, are subject to FICA, FUTA, and RRA payroll taxes.

Income tax is generally due as distributions are made

Distributions from a SIMPLE IRA are subject to the IRA rules and generally are includable in income for the year received.

You (or your employees) may be assessed a penalty for early withdrawal

If you or your employees make a withdrawal from a SIMPLE IRA before age 59½, there is a federal 10% premature distribution tax and possibly a state penalty, too, unless an exception applies. If you or your employees make a withdrawal before participating in the plan for two years, the federal pre-age 59½ penalty tax is 25%, not 10%.

Your business may qualify for the small employer pension plan start-up tax credit

If you establish a new SIMPLE IRA plan, you may be eligible to receive a business tax credit for 50% of the qualified start-up costs to create or maintain the plan in three tax years. The credit may be claimed for qualified costs incurred in each of the three years starting with the tax year when the plan became effective. The amount of the credit is limited in each of the three years to $500 to $5,000, depending on the number of employees.

Additional credits may apply for newly established plans. For employers with 50 employees or less, the start-up tax credit increases from 50% of qualified start-up costs to 100%. In addition, the Act offers a tax credit for employer contributions to employee accounts for the first five tax years of the plan’s existence. The amount of the credit is a maximum of $1,000 per participant, and for each year, a specific percentage applies. In years one and two, employers receive 100% of the credit; in year three, 75%; in year four, 50%; and in year five, 25%. The amount of the credit is reduced for employers with 51 to 100 employees. No credit is allowed for employers with more than 100 workers.

You or your employees may qualify for the tax credit for IRAs and retirement plans

Some low- and middle-income taxpayers may claim a federal income tax credit (“Saver’s Credit”) for elective deferrals made to SIMPLE IRAs and certain other employer-sponsored retirement plans.

Questions & Answers

What happens if you exceed the 100-employee limit after setting up a SIMPLE plan?

You have a two-year grace period after you exceed the limit. That is, you may continue to maintain the SIMPLE plan for the two calendar years following the calendar year in which you last satisfied the 100-employee limit.

If the failure to satisfy the 100-employee limitation is due to an acquisition, special rules may apply.

Can you impose different eligibility requirements for participation?

You can impose less restrictive eligibility requirements by eliminating or reducing the $5,000 salary requirement. So, for instance, you could allow employees who made $3,000 in the previous year to participate in the plan. Of course, if you reduce the eligibility requirements for participation, you must do so for all employees. You may not impose more restrictive eligibility requirements.

You are generally allowed to exclude certain employees from participation, such as employees covered by a collective bargaining agreement (if retirement benefits were bargained over) and nonresident aliens who receive no earned income from the employer from sources within the United States.

What happens if an employee participates in the retirement plan of another employer?

While the SIMPLE IRA must be your company’s only employer-sponsored retirement plan, it need not be the only plan in which your employees participate. Employees who also participate in plans of other employers are subject to overall limits on salary reduction contributions to the plans. The employee (and not you) is responsible for monitoring compliance with those limitations.

What counts as compensation for SIMPLE plan contributions?

Compensation includes wages, tips, and other compensation that is subject to income tax withholding, plus any contributions that the employee makes to the SIMPLE plan. For self-employed persons, compensation means net earnings from self-employment before subtracting any contributions to the SIMPLE IRA on behalf of the self-employed individual.

What if your employees don’t want their accounts in the institution that you have selected?

Employees must be allowed to transfer their accounts to other financial institutions without cost or penalty. You, however, can limit the transfers so that they may only be made during the annual enrollment period. In addition, during the first two years of participation, employees can move their funds to another SIMPLE IRA in a direct, tax-free, trustee-to-trustee transfer. After the end of this two-year period, employees can move their funds in a tax-free, trustee-to-trustee transfer to a traditional IRA.

Does an employee have the right to terminate a salary reduction agreement outside of the plan’s normal election period?

Yes. The employee must be allowed to terminate a salary reduction agreement at any time during the year. Your plan, however, may provide that any employee who terminates the salary reduction at any time outside of the annual election period is not eligible to resume participation until the beginning of the next calendar year.

Are employees allowed to take out loans or hardship withdrawals from their SIMPLE IRAs?

The SIMPLE IRA may not provide for participant loans. Employees can withdraw funds at any time subject to penalties. For applicable penalties, see the section above on tax considerations.

When must you deposit employees’ salary reduction contributions?

You must deposit employee contributions in the financial institution serving as the plan’s trustee as soon as reasonably possible, but no later than 30 days after the end of the month in which the amounts would otherwise have been payable to the employee. For plans with fewer than 100 participants, employers can deposit salary reduction contributions no later than the 7th business day after withholding it to be considered in compliance with the law.

When must you make your matching and nonelective contributions?

You must make the contributions no later than the due date for filing your income tax return, including extensions.

You have established a SIMPLE IRA, and your employee is deferring a portion of his or her income to the plan. Can the employee also make a deductible contribution to his or her own individual traditional IRA?

The employee also may contribute to his or her own individual IRA account, but whether that contribution is deductible depends on the rules governing IRAs. Those rules take into account the employee’s modified adjusted gross income, filing status, and participation in employer-sponsored retirement plans, including SIMPLE IRA plans.

Are distributions required at age 73?

Yes, required minimum distributions apply each year beginning with the year the employee turns age 73 (75 for those who reach age 73 after December 31, 2032).

For more detailed information about SIMPLE IRAs, see IRS Publication 560.

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