3708 / Do any special rules apply to a SIMPLE IRA plan?

All contributions to a SIMPLE IRA account must be fully vested and may not be subject to any prohibition on withdrawals, nor conditioned on their retention in the account.³ The early distribution penalty on withdrawals, however, is increased to 25 percent during the first two years of participation (see Q 3709).⁴

The participation requirements for SIMPLE IRAs state that all nonexcludable employees who received at least $5,000 in compensation from the employer during any two preceding years and are reasonably expected to receive at least $5,000 in compensation during the year must be eligible to make the cash or deferred election (if the matching formula is used) or to receive nonelective contributions (if the nonelective formula is used).⁵ Of course, employers are free to impose less restrictive eligibility requirements, such as a $3,000 compensation threshold, but they may not impose more restrictive ones.⁶ The $5,000 threshold compensation amount is not indexed for inflation. Nonresident aliens who received no U.S. income and employees subject to a collective bargaining agreement generally are excludable employees for purposes of the participation requirement.⁷ An employee who participates in another plan of a different employer may participate in a SIMPLE IRA plan, but will be subject to the aggregate limit of $23,500 (in 2025) on elective deferrals.⁸ An employer who establishes a SIMPLE IRA plan is not responsible for monitoring compliance with this limitation.⁹

Tax-exempt employers and governmental entities are permitted to maintain SIMPLE IRA plans. Excludable contributions may be made to the SIMPLE IRA of employees of tax-exempt employers and governmental entities on the same basis as contributions may be made to employees of other eligible employers.¹⁰ Related employers (i.e., controlled groups, partnerships or sole proprietorships under common control, and affiliated service groups) must be treated as a single employer for purposes of the SIMPLE IRA rules, and leased employees will be treated as employed by the employer. Consequently, all employees (and leased employees) of an employer who satisfy the eligibility requirements (see below) must be permitted to participate in the SIMPLE IRA of a related employer.¹¹

The administrative requirements for SIMPLE IRA plans state that an employer must deposit elective employee contributions (elective deferrals) within 30 days after the last day of the month in which the amounts would otherwise be payable to the employee in cash, and that employer’s matching and nonelective contributions must be made no later than the filing date for the return for the taxable year (including extensions).¹²

Employees must have the right to terminate participation at any time during the year; but the plan may preclude the employee from resuming participation thereafter until the beginning of the next year.¹³

Generally, each employee must have 60 days before the first day of any year (and 60 days before the first day the employee is eligible to participate) to elect whether to participate in the plan, or to modify his deferral amount.¹⁴ A SIMPLE IRA plan must be maintained on a calendar year basis.¹⁵ The IRS apparently has adopted a requirement that a plan be adopted not later than October 1 of the year for which the plan is established, but states that the October 1 requirement “does not apply to a new employer that comes into existence after October 1 of the year the SIMPLE IRA Plan is established if the employer establishes the SIMPLE IRA Plan as soon as administratively feasible after the employer comes into existence.”¹⁶

See Q 3709 regarding the tax treatment of SIMPLE IRA plan contributions, distributions, and rollovers. See Q 3778 regarding SIMPLE 401(k) plans.