3707 / What requirements apply to employer contributions to a SIMPLE IRA plan?

An employer who has set up a SIMPLE IRA must make either a matching contribution or a nonelective contribution each year on behalf of all participating employees.

Matching contribution: Under this option, the employer is generally required to match employee contributions dollar-for-dollar up to 3 percent of the employee’s compensation.¹ (Matching of catch-up contributions is not required.²) The employer may elect to reduce the matching percentage in a calendar year for all eligible employees, but such reduced percentage cannot be below 1 percent. To get the lower percentage, the employer must notify the employees of the election within a reasonable period of time before the 60-day election period for electing to participate in the plan.³ Also, the employer may not use the lower percentage if the election would result in the percentage being lower than 3 percent in more than two out of the five years ending with the current year. If the employer (or a predecessor employer) has maintained the plan for less than five years, the employer will be treated as if the percentage was 3 percent in the prior years during which the arrangement was not in effect.⁴ Also, if the employer made nonelective contributions for a year (instead of matching contributions) under the formula described below, it will be treated as having a percentage of 3 percent in that year.⁵

The compensation limits under IRC Section 401(a)(17) do not apply for purposes of the matching formula; thus, the 3 percent match would reach the maximum employer contribution limit of $16,500 in 2025 for an employee with compensation of $550,000 in a year.⁶

A matching contribution made to a SIMPLE IRA on behalf of a self-employed individual is not treated as an elective employer contribution for purposes of the limit on such contributions.⁷ The purpose of this provision is to treat self-employed individuals in the same manner as employees for purposes of the limit on elective contributions.

Nonelective contribution formula: As an alternative to making a matching contribution, an employer can make a nonelective contribution equal to 2 percent of a participating employee’s compensation. If this option is chosen, the employer must make this 2 percent contribution for all eligible employees whether or not the employee has made a contribution to the SIMPLE IRA for the calendar year.

Compensation for the purposes of this rule is capped at the annual limit of $350,000 for 2025. The employer may, but is not required to, limit nonelective contributions to eligible employees who have at least $5,000 (or some lower amount selected by the employer) of compensation for the year.

If the employer chooses the nonelective option, it must notify the employees within a reasonable time before the 60-day election period for electing to participate in the plan or make elective deferrals.⁸ The compensation limit under IRC Section 401(a)(17) does apply for purposes of this formula; thus, the maximum amount that could be contributed in nonelective contributions for an employee would be $7,000 (i.e., 2 percent of $350,000 (in 2025)).⁹

A SIMPLE IRA is not subject to the nondiscrimination or top-heavy rules associated with other plans, and the reporting requirements it must meet are simplified.¹⁰