How SIMPLE IRA Employer Contributions Work

Every year you run a SIMPLE IRA as a business owner, you're on the hook for a contribution. You've got two choices: match what your employees put in, up to 3% of pay, or contribute 2% of pay to every eligible employee whether they contribute or not.

The match rewards participation. The nonelective contribution doesn't care if anyone participates — you're paying it either way. That difference affects both how your employees behave and how predictable your costs are.

3% Match Example

Say one of your employees earns $80,000 and puts 5% of their pay into their SIMPLE IRA. That's $4,000 from them. Your match is capped at 3% of compensation, so you owe $2,400.

If another employee contributes nothing, you generally don't owe them a match under this formula. Simple as that.

This option tends to feel more flexible for you as the business owner, because your cost scales with participation.

2% Nonelective Example

Now say that same $80,000 employee is at a company using the 2% nonelective formula instead. That would mean you owe them $1,600 — whether they contribute a dollar or not. For 2026, the compensation cap used for this formula is $360,000.

This option is easier to explain to your team, but it also means you're paying for employees who aren't actively choosing to contribute anything.

Employer formula	How it works	Best fit	Watch out for
3% match	You match employee deferrals dollar-for-dollar up to 3% of pay	You want your cost tied to participation	Employees who don't contribute generally get nothing from you
2% nonelective	You contribute 2% of eligible compensation to everyone	You want a predictable, universal benefit	You're paying even when employees save nothing
Enhanced SECURE 2.0 formula	You offer a $18,100 deferral limit instead of $17,000, but must bump your contribution to a 4% match or 3% nonelective	You specifically want to offer employees more room to save	Higher required cost across your whole payroll — plus the lower catch-up quirk we covered above

For a lot of business owners, the 3% match may feel easier because it rewards the people actually participating. The 2% nonelective contribution can be a better cultural fit if your goal is giving every eligible employee a retirement benefit, period, regardless of whether they save from their own pocket or not.

Neither one is automatically the right answer. It comes down to your payroll, your margins, how many of your employees actually participate, and how predictable you need your costs to be.

Who Is Eligible for a SIMPLE IRA?

A business can generally establish a SIMPLE IRA if it had 100 or fewer employees who earned at least $5,000 during the preceding calendar year and does not currently maintain another retirement plan.

Employee eligibility also depends on how you draw up the plan document. You may choose to cover all employees, or limit participation to employees who earned at least $5,000 during any two prior years and are reasonably expected to earn at least $5,000 during the current year.

This is where the SIMPLE IRA decision becomes more than a question of how much you, yourself as the business owner, can contribute. If you have several employees who meet the eligibility rules, the employer contribution cost may be much larger than expected. Before adopting the plan, review payroll carefully and ask:

• Who is eligible now?
• Who may become eligible next year?
• How much would the 3% match cost if most employees participate?
• How much would the 2% nonelective contribution cost even if employees do not participate?
• Would the plan still make sense if the team grows?

Many of these things are best modeled with some type of software so you can get a better grasp on the expected costs.

SIMPLE IRA vs. SEP IRA vs. Solo 401(k) vs. 401(k)

A SIMPLE IRA is your best bet when you want employee salary deferrals with less administrative overhead than a traditional 401(k). A SEP IRA is usually stronger if you only want to make employer contributions. A Solo 401(k) tends to be the most flexible option if it's just you (or you and a spouse). A traditional 401(k) gives you the most design flexibility, but it comes with the most administration too.

Plan type	Best fit	Employee deferrals	Employer funding	2026 limit context	Main limitation
SIMPLE IRA	Small businesses with employees	Yes	Required match or nonelective	$17,000 standard employee deferral ($18,100 for eligible small employers)	Lower limits than a 401(k)
SEP IRA	Self-employed owners or businesses with variable profit	No	Employer-only	Lesser of 25% of compensation or $72,000	Same contribution percentage required for all eligible employees
Solo 401(k)	Owner-only business, or owner + spouse	Yes	Employee + employer funding	$24,500 employee deferral ($8,000 catch-up at 50+, $11,250 at 60–63); $72,000 annual additions limit	Not usable once you have common-law employees
Traditional 401(k)	Growing companies that need flexibility	Yes	Flexible plan design	$24,500 employee deferral ($8,000 catch-up at 50+, $11,250 at 60–63); $72,000 annual additions limit	More administration and compliance
Cash balance plan	High-income owners with stable cash flow	No salary deferral structure	Actuarial funding	Varies by age, income, and plan design	Higher complexity and funding commitment

IRS guidance confirms the 2026 SEP IRA limit is the lesser of 25% of compensation or $72,000, and SEP plans don't allow employee elective deferrals or catch-up contributions. IRS guidance also puts the 2026 401(k) employee deferral limit at $24,500, with a $72,000 annual additions limit.

Owner-only businesses should compare SEP IRA vs Solo 401(k) before choosing a SIMPLE IRA. Companies with employees should also compare SEP IRAs for business owners because employee eligibility can materially change the employer’s cost.

When a SIMPLE IRA Makes Sense

A SIMPLE IRA is a good fit if you want employee payroll deferrals, you can comfortably afford the required employer contribution, and you'd rather avoid the administrative lift of a traditional 401(k).

It tends to work well if you're:

• Running a business with 100 or fewer eligible employees
• Looking for a retirement benefit without annual Form 5500 filings
• Able to fund a 3% match or 2% nonelective contribution without straining cash flow
• Trying to help your team build a savings habit through payroll deductions
• Looking for a simple first workplace retirement plan
• Someone who wants a plan you can explain to employees more easily

The Department of Labor notes SIMPLE IRA plans can lower your taxes, help you attract and keep employees, and generally cost less to start and run than most other retirement plans.

But don't think of it as just a savings account. It's an employee benefit with an annual funding obligation attached to it. That's not necessarily a bad thing — it can help your team start saving and show them you're investing in their future. Just go in with your eyes open about the cost.

When a SIMPLE IRA May Not Be the Best Fit

A SIMPLE IRA may not be your best move if you want higher contribution capacity, plan loans, vesting schedules, discretionary employer funding, or more advanced plan design.

It may be weaker for:

• Owner-only businesses trying to maximize contributions
• High-income owners considering cash balance or defined benefit strategies
• Companies expecting rapid employee growth
• Employers that want to provide the option of plan loans
• Businesses that already maintain another retirement plan
• Owners who want discretionary year-by-year employer contributions
• Companies that may soon need a more customizable 401(k)

This is where many owners outgrow a SIMPLE IRA. It may work well when the business is small and payroll is predictable. Later, a 401(k), profit-sharing plan, or cash balance plan may create more flexibility.

How to Set Up a SIMPLE IRA

You set up a SIMPLE IRA by choosing a financial institution, picking the right plan document, notifying your employees, opening their accounts, and getting payroll coordinated.

The Department of Labor recommends starting by talking to a retirement plan professional or financial institution, then choosing where accounts will live, picking a plan document, and completing the IRS model form (or another approved one).

Step 1: Choose the Financial Institution

The employer can designate the financial institution that will hold the SIMPLE IRA accounts, or the plan can allow employees to choose where contributions are deposited. This choice affects employee experience, investment options, payroll coordination, and how easy the plan is to administer.

Step 2: Select Form 5304-SIMPLE or Form 5305-SIMPLE

Use Form 5304-SIMPLE if employees can choose the financial institution for their SIMPLE IRA accounts. Use Form 5305-SIMPLE if you as the employer will designate the financial institution for all contributions.

Step 3: Notify Eligible Employees

Employees must receive information about eligibility, salary deferral rights, and the employer contribution formula before the annual election period. Do not treat this as a paperwork formality. Clear employee communication can reduce confusion later.

Step 4: Open SIMPLE IRA Accounts

Each eligible employee needs an individual SIMPLE IRA account to receive salary deferrals and employer contributions. If an account is not opened, contributions can be delayed, payroll can become messy, and the plan may be harder to administer.

Step 5: Fund Contributions on Schedule

Employee salary reduction contributions must generally be deposited within 30 days after the end of the month in which the money would otherwise have been paid in cash. Employer matching or nonelective contributions are generally due by the business tax filing deadline, including extensions.

This is one of the most important operational details. Once money is withheld from employee pay, the business needs a process to deposit it on time.

SIMPLE IRA Deadlines to Know

You generally need to have your SIMPLE IRA up and running by October 1 for it to count for that calendar year. Once it's established, you'll also run an annual election period, generally before the next plan year kicks off.

Deadline	Rule
New SIMPLE IRA setup	Generally no later than October 1
Employee election period	Generally before the next calendar year
Employee deferral deposits	Within 30 days after the end of the month withheld
Employer match or nonelective contribution	Your business tax return deadline, including extensions
Annual employee notice	Before the employee election period

This matters because a lot of owners start thinking about retirement plans at year-end — right when it's too late to set up a new SIMPLE IRA for that year.

How a SIMPLE IRA Gets Taxed

Traditional SIMPLE IRA salary deferrals come out of your employees' pay before federal income tax, but withdrawals get taxed as ordinary income later. Your contributions as the employer are generally deductible when made under the plan rules.

One thing worth knowing for payroll purposes: employee deferrals are exempt from federal income tax withholding, but they're still subject to Social Security, Medicare, and FUTA taxes. Your match or nonelective contributions, on the other hand, aren't subject to any of those payroll taxes. That distinction matters when you're setting up payroll codes or reconciling your quarterly filings.

A SIMPLE IRA lowers taxable income today but creates taxable withdrawals down the road. That makes it part of your broader tax strategy — not just a payroll line item.

If you're an active participant in your own plan, make sure your compensation, payroll documentation, and contribution planning line up with how you're paying yourself — salary vs. owner's draw matters here.

Owner compensation, payroll documentation, and contribution planning should align with salary vs. owner’s draw when the business owner is also an active participant in the plan.

Can a SIMPLE IRA Include Roth Contributions?

Yes. SECURE 2.0 opened the door for SIMPLE IRA plans to include Roth contributions. The IRS confirms you can let participating employees choose to have their salary deferrals go into a Roth IRA instead of a traditional one.

Roth SIMPLE contributions come out after tax — so they won't lower anyone's taxable income today, but qualified withdrawals can come out tax-free later if IRS requirements are met.

Roth makes the most sense if you or your employees expect higher tax rates down the road, or just want more tax diversification in retirement. A traditional SIMPLE IRA is usually still the better call if that immediate deduction matters more right now.

This choice should be coordinated with your broader retirement tax planning because current deductions, Roth balances, future withdrawals, and future required minimum distributions can all interact as you create your financial plan for the future.

SIMPLE IRA Cash Flow Considerations (Before You Commit) 

A SIMPLE IRA creates a funding obligation you'll have every single year. A 3% match depends on participation. A 2% nonelective contribution doesn't — you owe it regardless.

That gap matters a lot if your revenue is seasonal, your owner distributions are uneven, you're hiring fast, or your margins move around.

One thing that's always true either way: contributions are 100% vested immediately. Your employees own that money the moment it lands, no waiting period. 

Before you adopt the plan, stress-test the formula against your actual cash flow. If revenue dips every summer but payroll stays flat, are you still comfortable making the required contribution? If you hire several more eligible employees next year, does the math still work?

This is exactly why plan selection needs to connect to your broader financial planning for the business — not just a contribution-limits chart.

This is why plan selection should connect with broader financial planning for businesses, not just retirement contribution limits.

Common SIMPLE IRA Mistakes

The most common mistakes owners make: using outdated limits, missing the October 1 setup deadline, picking the wrong employer formula, leaving eligible employees out, and not depositing contributions on time.

Watch out for:

• Using old contribution limits after the IRS updates them
• Forgetting the age 60–63 catch-up rule exists
• Picking the 2% nonelective formula without modeling your eligible payroll first
• Missing employee notice deadlines
• Assuming you can run a SIMPLE IRA alongside another plan for the same employees (you generally can't)
• Keeping the plan around after your business has outgrown it
• Treating setup as a one-time task instead of an annual review
• Forgetting all contributions vest immediately
• Not coordinating payroll, tax deductions, and your own compensation

A SIMPLE IRA can be simple to run — but it's not something you set up once and forget about.

The best time to catch these issues is before you adopt the plan, not after your employees are already expecting contributions.

When Should You Talk To a Financial Advisor?

It's worth having a planning conversation if you're:

• Hiring employees for the first time
• Wanting to save more for retirement through the business
• Weighing a SIMPLE IRA against a SEP IRA, Solo 401(k), or traditional 401(k)
• Curious whether Roth SIMPLE contributions make sense for your situation
• Dealing with seasonal or uneven cash flow
• Within 10 years of retirement
• Thinking about selling the business down the road
• Trying to use retirement benefits to attract or keep employees

A retirement plan should support your business, not strain it. The right one fits your payroll, your taxes, your hiring goals, your own savings needs, and where the company is headed.

Bottom Line on SIMPLE IRAs for Business Owners

A SIMPLE IRA can be a strong plan if you want employee salary deferrals, manageable (but required) employer contributions, and less administration than a traditional 401(k).

It's usually not the best fit if you're a high-income owner, running an owner-only business, growing fast, or need more advanced plan design.

The right call depends on your employee count, payroll cost, cash flow, tax goals, and where your business is headed.

The strongest move is comparing the SIMPLE IRA against a SEP IRA, Solo 401(k), traditional 401(k), and cash balance options before you commit to a formula.

If you want help choosing or reviewing a plan for your business, our financial advisors here at The Troncoso Group are happy to help you compare your options and figure out what actually fits your business, your employees, and your long-term retirement plan.

Disclosures: Jaffe Tilchin Investment Partners is a Registered Investment Advisor. Certain representatives of Jaffe Tilchin Investment Partners are also Registered Representatives offering securities through APW Capital, Inc., Member FINRA/SIPC. 999 Riverview Drive Suite 201 Totowa, NJ 07512. (800)637-3211 Check the background of this firm on FINRA’s BrokerCheck.