A Savings Incentive Match Plan for Employees (SIMPLE) IRA plan is a cost-effective way for a small business to offer a meaningful retirement savings option for its employees. There are no statistics on how much these plans are used as compared with other retirement plan options—I’m guessing not so much. But small business owners who want to help employees save for retirement should give SIMPLE IRAs a closer look because of the advantages they offer in comparison to other plan options. The challenge assessing SIMPLE IRAs are new rules for 2025 that complicate things for employers and employees. Here’s where things stand now.
Overview
Not much has changed in the basic rules since SIMPLE IRAs were created by legislation in 1996. They can only be used by a business with no more than 100 employees who earned $5,000 or more during the preceding calendar year and that doesn’t have another retirement plan. They continue to offer advantages:
Set up and administration. They are simple to set up through a brokerage firm or other financial institution. They provide the paperwork:
- IRS Form 5304-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) – Not for Use with a Designated Financial Institution, if employees are allowed to select the financial institutions that will receive their SIMPLE IRA plan contributions; or
- IRS Form 5305-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) – for Use with a Designated Financial Institution, if the employer requires that all contributions under the SIMPLE IRA plan be initially deposited with a designated financial institution.
Administrative costs are relatively low. And unlike 401(k)s, there is no annual filing with the DOL to report on the plan.
Contributions. Employees make elective deferrals from their compensation, which is handled through payroll withholding. This withholding must be transferred to the financial institution no later than 30 days after the end of the month they’d otherwise be payable to employees. Employers must make certain contributions (explained later), but they are relatively modest.
Tax treatment. Employees are not currently taxed on their elective deferrals, although they are treated as wages for purposes of FICA. Employers can deduct their contributions. And they may be entitled to certain tax credits.
More about contributions
The tax law limits what employees can contribute annually and spells out what employer must contribute annually.
Employee contributions. There are 2 types of contributions: basic and catch-up for those age 50 and older by the end of the year:
Basic contribution limit for 2025: The basic elective deferral—a salary reduction amount that doesn’t count as taxable wages for the year—is $16,500. But for a company with 25 or fewer employees or more than 25 but not more than 100, the limit is $17,600, provided the employer makes a 4% matching contribution or a 3% non-elective contribution. Employer contributions are explained later.
Catch-up contribution limits for 2025. There are 3 possible catch-up contributions amounts, depending on an employee’s age and the number of employees in the business. For 2025, the catch-up contribution limits are:
- For those age 50 or older by December 31, 2025 (and higher limit does not apply): $3,500
- For employees in companies with 25 or fewer employees or more than 25 but not more than 100 and the employer makes a 4% matching contribution or a 3% non-elective contribution: $3,850.
- For those age 60, 61, 62, and 63 in 2025: $5,250
SIMPLE IRA Deferral Limits for 2025
| Employee’s Age | Employer with under 26 employees | Employer with 26 or more employees |
| Basic elective deferral limit | $17,600 | $16,600 |
| Catch-up: age 50-59 | 21,450 | 20,000 |
| Catch-up: age 60-63 | 22,850 | 21,750 |
| Catch-up: age 64 and older | 21,450 | 20,000 |
Employer contributions. When making a budget for the coming year, employers can pretty much determine what the plan will cost them. Employers must make either:
- Dollar-for-dollar match, generally up to 3% of compensation. Only participating employees who make contributions receive an employer matching contribution.
- 2% non-elective employer contribution. Employees eligible to participate receive an employer contribution of 2% of their compensation (limited to $350,000 in 2025), regardless of whether they make their own contributions.
For employers in companies with (1) 25 or fewer employees or (2) more than 25 but not more than 100 that want to enable a higher catch-up amount for employees: 4% matching contribution or a 3% non-elective contribution (mentioned earlier).
Communication with employees
You are required to inform employees about the plan, their participation, and more.
About the plan. You must give employees a summary description of the plan informing them of their rights and responsibilities (e.g., when they’re eligible to participate, how to make salary elections, what happens when they want to take money out). This requirement is met by giving them a copy of Form 5304 or 5305 (explained earlier), along with the financial institution’s procedures for withdrawals and transfers.
You must also give employees an annual election notice describing the salary reduction contribution rules for the year. This references the basic and catch-up contribution limits.
Timing. During the 60-day election period at the end of the year, employers must give employees the opportunity to enter into a salary reduction agreement or to modify an existing agreement.
Distributions. Everything that goes into the plan—employee and employer contributions—belong immediately to employees. They can take distributions, but will be taxed on them. Withdrawals within 20 years of participation are subject to a 25% penalty. Distributions before age 59½ are subject to a 10% penalty, unless a penalty exception applies. Funds in SIMPLE IRAs are subject to required minimum distribution rules, which means distributions must begin at age 73 or there will be a 25% penalty (10% if the distribution failure is timely corrected).
Final thought
If you are interested in having a SIMPLE IRA for your business, there are a number of good resources:
- DOL SIMPLE IRA Plans for Small Businesses
- IRS Publication 560. Note: This isn’t up-to-date yet.
- IRS QandAs
- IRS SIMPLE IRA Plan Checklist
Discuss your interest and concerns about SIMPLE IRAs with your tax adviser.
