SIMPLE IRA Basics for Small Business Owners

The Savings Incentive Match Plan for Employees IRA — SIMPLE IRA — is the lowest-administrative-cost qualified retirement plan available to small employers. For a business with under 100 employees and modest savings ambitions, it works. For one growing past those thresholds, the SIMPLE quickly becomes a constraint.

2025 contribution limits

• Employee deferral: $16,500
• Age-50 catch-up: +$3,500
• SECURE 2.0 super catch-up (ages 60–63): +$5,250 instead of $3,500
• SECURE 2.0 §117 increase: employers with 25 or fewer employees may elect a 110% deferral limit ($18,150 base, $3,850 catch-up) starting 2024

Mandatory employer contribution

Under IRC §408(p), the employer must choose one of two formulas every year:

• 3% match. Match employee deferrals up to 3% of compensation, dollar for dollar. The 3% can be reduced to as low as 1% in two of any five years.
• 2% non-elective. 2% of compensation for every eligible employee, whether or not they defer.

Both contributions are immediately 100% vested.

Eligibility ceiling: 100 employees

SIMPLE IRAs are available only to employers with 100 or fewer employees who earned at least $5,000 in the prior year. SECURE 2.0 §117 raised that compensation threshold but kept the 100-employee cap. An employer that crosses 100 employees has a two-year grace period before the plan must be terminated or converted.

Conflict with other plans

An employer that sponsors a SIMPLE IRA cannot also sponsor a 401(k), 403(b), or profit-sharing plan in the same calendar year. The §408(p)(2)(D) "exclusive plan" rule is a hard stop. SECURE 2.0 §332 added a limited mid-year transition rule allowing termination of a SIMPLE and adoption of a safe harbor 401(k) effective the day after termination — useful for growing businesses that want to upgrade mid-year.

The two-year withdrawal penalty

SIMPLE IRA withdrawals taken within two years of the participant's first contribution are subject to a 25% early-distribution penalty under IRC §72(t)(6), not the usual 10%. The same 25% applies to rollovers to a non-SIMPLE IRA during the two-year window. Direct rollovers to another SIMPLE IRA are exempt.

The two-year clock starts the day the participant's first SIMPLE deferral hits her account, not the plan's inception date.

SIMPLE IRA vs Solo 401(k)

For an owner-only business, the Solo 401(k) almost always wins on contribution capacity. For a small employer with 5–20 staff, the SIMPLE wins on administrative simplicity.

Common mistakes

• Rolling out within two years. The 25% penalty is much steeper than the typical 10% — and most participants don't know about it.
• Attempting to add a 401(k) alongside. The exclusive-plan rule forbids it for the same calendar year except in the SECURE 2.0 transition path.
• Forgetting the 60-day notice. The employer must give participants a 60-day enrollment window before the start of each plan year (typically November 2 through December 31).
• Skipping the form. SIMPLE IRA plans are adopted by completing IRS Form 5304-SIMPLE or 5305-SIMPLE and providing it to participants. There is no annual Form 5500 filing — but the adoption form is mandatory.

Sources

• Internal Revenue Code §408(p), SIMPLE retirement accounts (Cornell LII): law.cornell.edu/uscode/text/26/408
• Internal Revenue Code §72(t)(6), 25% penalty on SIMPLE early withdrawals: law.cornell.edu/uscode/text/26/72
• SECURE 2.0 Act §117 (higher limits for small employers) and §332 (mid-year transition), Pub. L. 117-328: congress.gov/bill/117th-congress/house-bill/2617
• IRS Publication 560, Retirement Plans for Small Business: irs.gov/forms-pubs/about-publication-560
• IRS Form 5305-SIMPLE: irs.gov/forms-pubs/about-form-5305-simple

RetirementCheck101 maps SIMPLE eligibility and flags the upgrade-to-401(k) decision when your business outgrows the cap. Explore the free educational tool.