3706 / What is a SIMPLE IRA plan?

A SIMPLE IRA plan may permit contributions only under a qualified salary reduction arrangement, which is defined as a written arrangement of an “eligible employer” (defined below) under which:

(1)   employees eligible to participate may elect to receive payments in cash or
contribute them directly to a SIMPLE IRA per a salary deferral;

(2)   the amount to which such an election applies must be expressed as either a percentage of compensation or as a dollar amount, but in any case cannot exceed $16,500 per year (for 2025), up from $16,000 per year for 2024²);

(3)   the employer must make matching contributions or nonelective contributions to the account according to one of the formulas described in Q 3707; and

(4)   no contributions other than those described in (1) and (3) may be made to the account.³

Certain lower income taxpayers may be eligible to claim the saver’s credit for elective deferrals to a SIMPLE IRA ( Q 3648).

Elective Deferral and Catch-up Contributions

The amount contributed via an elective deferral cannot exceed $16,500 in 2025.⁴ A SIMPLE IRA plan, however, may permit catch-up contributions by participants who reach age 50 (or over) by the end of the plan year.⁵ The limit on catch-up contributions to SIMPLE IRAs is the lesser of (a) a specified dollar limit, or (b) the excess (if any) of the participant’s compensation over any other elective deferrals for the year made without regard to the catch-up limits.⁶ The dollar limit is $3,500 in 2023-2025 and $3,000 in 2016-2022.⁷

A SIMPLE IRA will not be treated as violating any of the applicable limitations of Section 408(p) merely on account of the making of (or right to make) catch-up contributions, provided a universal availability requirement is met.⁸ See Q 3761 for details on the requirements for catch-up contributions.

Elective contribution amounts made under a SIMPLE IRA plan are counted in the overall limit ($23,500 in 2025, $23,000 in 2024, $22,500 in 2023, $20,500 in 2022, $19,500 in 2020-2021, and $19,000 in 2019) on elective deferrals by any individual.⁹ See Q 3760 for the definition of “elective deferral.” Thus, for example, an individual under age 50 who defers the maximum of $16,500 to a SIMPLE IRA of one employer and participates in a 401(k) plan of another employer would be limited to an elective deferral of $7,000 in 2025 to the 401(k) plan.¹⁰ Catch-up contributions are not subject to the limits of IRC Section 402(g) and do not reduce an individual’s otherwise applicable deferral limit under any other plan.¹¹

Definitions

An arrangement will not be treated as a qualified salary reduction arrangement if the employer, or a predecessor employer, maintained another qualified plan (including a 403(a) annuity, a 403(b) tax sheltered annuity, a SEP, or a governmental plan other than an IRC Section 457 plan) under which contributions were made or benefits accrued for service during any year in which the SIMPLE IRA plan was in effect. But if only employees other than those covered under a collectively bargained agreement are eligible to participate in the SIMPLE IRA plan, this rule will be applied without regard to a collectively bargained plan.¹² Also, for purposes of this rule, transfers, rollovers, or forfeitures are disregarded except to the extent that forfeitures replace otherwise required contributions.¹³

Only an eligible employer may adopt a SIMPLE IRA plan. An “eligible employer” is defined as an employer who employed no more than 100 employees earning at least $5,000 from the employer during the preceding year.¹⁴ For purposes of this limitation, all employees employed at any time during the calendar year are taken into account, even those who are excludable or are ineligible to participate. Furthermore, certain self-employed individuals who receive earned income from the employer during the year must be counted for purposes of the 100-employee limitation.¹⁵ An employer who maintains a plan in which only collectively bargained employees may participate is not precluded from offering a SIMPLE IRA to its noncollectively bargained employees.¹⁶

Generally, an eligible employer who ceases to be eligible after having established and maintained a SIMPLE IRA plan for at least one year will, nonetheless, continue to be treated as eligible for the following two years.¹⁷ But special rules apply where a failure to remain eligible (or to meet any other requirement of IRC Section 408(p)) was due to an acquisition, disposition, or similar transaction involving another eligible employer.¹⁸

Compensation, for purposes of most of the SIMPLE IRA provisions, includes wages (as defined for income tax withholding purposes), elective contributions made under a SIMPLE IRA plan, and elective deferrals, including compensation deferred under an IRC Section 457 plan.¹⁹ A self-employed individual who is treated as an employee may be a participant in a SIMPLE IRA plan; for this purpose, “compensation” means net earnings from self-employment, prior to subtracting the SIMPLE IRA plan contribution.²⁰ An employee’s elective deferrals under a 401(k) plan, a SAR-SEP, and a Section 403(b) annuity contract are also included in the meaning of compensation for purposes of the 100-employee limitation (i.e., the $5,000 threshold) and the eligibility requirements.²¹