What Is a SIMPLE IRA? A Plain-English Guide for Employers

A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a small business workplace retirement plan that is available to employers who have 100 or fewer employees. The employee puts aside a portion of each paycheck pre-tax in their own SIMPLE IRA and then the employer will put in an additional required contribution based on one of two ways: either matching dollars up to 3% of pay, or adding 2% for every employee. It was created by Congress as the retirement plan option for small businesses that has nearly all of the value of a 401(k) but very little administrative cost, no Form 5500 filings are needed and there is no need for nondiscrimination testing.

How does a SIMPLE IRA work?

The mechanics of payroll are what run through SIMPLE IRAs. Each employee is able to choose a deferral percentage, the employer will withhold this amount from each paycheck pre-tax and then make contributions into an employee's own IRA. The required employer contribution also gets deposited on top using either of the two formulas in IRS SIMPLE IRA regulations.^[1] The account belongs to the employee as soon as money is deposited in it (no vesting period), and there is nothing to forfeit when leaving. Employees' deferral limits and catch-up amounts for simple ira plans adjust annually, please refer to 2026 contribution limits guide for current numbers.

Adoption is intentionally light. The employer simply signs a short IRS Form (5304-SIMPLE or 5305-SIMPLE) that they will never submit to the IRS, only keep as part of their own records. The only difference in these two forms is who chooses the custodian, see Form 5304 vs. 5305-SIMPLE. After the employer has signed the form and employees receive their notification, payroll deferral may begin.

Who can offer a SIMPLE IRA?

Any business with no more than 100 employees who earned $5,000 or more in compensation during the previous calendar year may sponsor a SIMPLE IRA plan, as set out by the headcount and pay tests in 26 U.S.C. 408(p).^[3] The form of the business sponsoring the SIMPLE IRA is irrelevant. This applies equally to sole proprietorships, partnerships, limited liability companies (LLCs), S corporations, C corporations, and nonprofit organizations. For purposes of determining whether an employer has 100 or fewer employees for purposes of sponsoring a SIMPLE IRA plan, employers are required to include both full-time and part-time employees who cross the $5,000 threshold regardless of how many hours those employees work each week. Therefore it does not take a large number of full-time employees working long hours to reach the 100-employee limit. Seasonal workers working short weeks are counted the same way, so part-time staff can push you toward the limit faster than headcount suggests.

A simple rule for exclusive use of one type of retirement plan is a problem for small businesses with employees. A SIMPLE IRA may be used by an employer as long as it is the only type of retirement plan the employer maintains while it is receiving contributions. Thus, an employer can't have a 401(k) and/or SEP IRA in addition to a SIMPLE IRA during the same year. If you outgrow the 100-employee limit, IRS rules allow you to continue operating under this plan for two years after reaching such limits before you must replace it with another type of plan.

What does a SIMPLE IRA cost?

SIMPLE IRA plans are the lowest-cost employer retirement plan to administer in terms of both price (custodial pricing runs from free, with manual administration, to a few hundred dollars a year) and operational cost. No TPA is needed. An annual Form 5500 does not need to be completed by the sponsor nor will there ever be an audit, unlike a 401(k). Consequently, the main "cost" that a SIMPLE IRA sponsor would have to budget for on an ongoing basis is the required employer contribution, either the 3% match or the 2% non-elective, based upon payroll and participation rather than upon administration.

Two SECURE 2.0 credits change the math for new plans:

Both credits are considered to be non-refundable under the new SECURE 2.0 startup rules. Therefore, they will be applied directly to reduce your federal tax liability as opposed to generating an additional refund.^[2] IRAPilot's tracking and set up tools are provided at no cost to the client, and the startup credit provides reimbursement of any qualifying startup expenses incurred by a business during their first three plan years.

What are a SIMPLE IRA employer's obligations?

A SIMPLE IRA has three recurring duties, which are all operational as opposed to paper work related. The employee contributions must be delivered to the custodian no later than 7 business days after each payroll, per the DOL's small plan safe harbor. All employees that are eligible for a SIMPLE IRA must receive written notice at least 60 days prior to the first day of the next plan year. In calendar year plans this is on or before November 1. Additionally, W-2's will require proper reporting of an employer-sponsored retirement plan and must include the appropriate Box 12 code S and check off that it is a "retirement plan". None of these involve any filings with the IRS.

All of these have an actual deadline that regulators look at, and those unautomated parts are the most common SIMPLE IRA failures the IRS finds. Sponsors fail most frequently by failing to deposit timely, and that is why there is IRAPilot. The complete checklist along with the Compliance Calendar can be found in SIMPLE IRA Rules for Employers.

How does a SIMPLE IRA compare to other plans?

A SIMPLE IRA is located somewhere in between a personal IRA and a 401(k). As compared to the personal traditional IRA it has more than double the deferral contribution opportunity with much less administrative burden as when compared to a 401(k). In other words: no Form 5500, no Nondiscrimination Testing, and no Third Party Administrator. With that being said, you will lose some flexibility because with a 401(k) you can have larger total contributions, loan opportunities and Vesting Schedules, none of which are allowed under a SIMPLE IRA.

In most businesses with fewer than about 25 employees, the simplicity wins, and you can move to a safe harbor 401(k) later in your business development when the numbers will favor this option. A SIMPLE IRA will satisfy State Auto-IRA Mandates such as CalSavers, so sponsoring a SIMPLE IRA will exempt your company from the state Auto-IRA mandate. Start by considering options SIMPLE IRA vs. 401(k) and SEP IRA vs. SIMPLE IRA.

The Bottom Line

A SIMPLE IRA is the small business retirement program that Congress created for groups of 100 or fewer employees. In this type of plan, employee contributions are made by deferring income and the employer adds either a 3% matching amount or a 2% non-elective contribution for all eligible employees. There is no Form 5500 and there is no nondiscrimination testing requirement. The only thing an employer has to do to create a SIMPLE IRA is complete a one-time IRS Form and then handle the administrative tasks involved in operating the plan, including timely deposits and the annual notice. As such, it is typically the least expensive way for most small businesses to comply with a state-mandated retirement savings requirement while providing actual benefits to employees.

This guide is educational and summarizes IRS rules for SIMPLE IRA plans. It is not investment, legal, or tax advice. Your plan documents and current IRS limits control. Talk to your tax advisor about your business's circumstances.