SIMPLE IRA Plans for Small Employers: Basic Rules

Publication 560 (2025), Retirement Plans for Small Business, explains the SIMPLE IRA plan. A SIMPLE plan is a retirement plan for small employers. Employees can choose to set aside part of their pay, and the employer must also contribute. This guide is general information. It is not advice about your plan.

Who can set up the plan

The publication says you can set up a SIMPLE IRA plan only if you had 100 or fewer employees who received at least $5,000 in pay from you for the preceding year. You count all employees who worked for you at any time during the calendar year, even if they are not eligible. Once the plan is set up, you must keep meeting the 100-employee limit each year. In general, the SIMPLE plan must be the only retirement plan you contribute to for the same employees.

Who can take part

An employee is eligible if they received at least $5,000 in compensation during any 2 preceding years, and are reasonably expected to receive at least $5,000 in the current year. You can use looser rules, such as a $3,000 threshold, but you cannot add other conditions. A self-employed person with earned income counts as an employee.

Two kinds of contributions

The first kind is salary reduction contributions, which the employee chooses. The publication says these generally cannot be more than $16,500 for 2025, and $17,000 for 2026. Employees age 50 or over can also make catch-up contributions, generally up to $3,500 for 2025.

The publication also says a plan can allow longer election periods than 60 days. For example, a plan can provide a 90-day election period, so employees have more time to set or change their salary reduction choice.

The second kind is employer contributions. You must choose one of two formulas:

Matching. You match each employee's salary reduction dollar for dollar, up to 3% of pay. You can choose a lower percentage, but not below 1%, and only under the limits the publication describes.
Nonelective. You contribute 2% of pay for each eligible employee who had at least $5,000 in pay for the year. You must do this even if the employee makes no salary reduction contributions.

The publication gives this example of the matching formula. In 2025, an employee earns $25,000 and defers 5% of pay, which is $1,250. The employer makes a 3% matching contribution of $750. The total contribution for the employee is $2,000.

Deposit deadlines

Salary reduction contributions must be made within 30 days after the end of the month in which the pay would otherwise have been paid in cash. Matching or nonelective contributions are due by the due date of your federal return for the year, including extensions. The publication says these employer contributions, which you can deduct, must be made on time.

Setting up the plan

You can use Form 5304-SIMPLE or Form 5305-SIMPLE. Use Form 5304-SIMPLE if employees choose the financial institution. Use Form 5305-SIMPLE if all contributions go to a designated institution. Keep the signed form. Do not file it with the IRS. You must notify each eligible employee before the election period, which is generally the 60 days before January 1.

Withdrawals

Distributions from a SIMPLE IRA are generally included in income for the year received. A rollover to another SIMPLE IRA is allowed without tax. A rollover to a non-SIMPLE IRA is not taxed only after 2 years of participation. Early withdrawals are generally subject to a 10% additional tax. That additional tax rises to 25% if the withdrawal is made within 2 years of when the employee began participating.

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Sources: Sources: IRS, Publication 560 (2025), Retirement Plans for Small Business, chapter 3 (https://www.irs.gov/pub/irs-pdf/p560.pdf); Savings Incentive Match Plan for Employees (SIMPLE) This is general information, not advice about your specific return.

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