SIMPLE IRA: A Guide for Small Businesses

TL;DR: A SIMPLE IRA is a salary-deferral retirement plan available only to employers with 100 or fewer employees. Eligible workers can defer up to $17,000 of salary in 2026, plus a $4,000 catch-up at age 50 or a $5,250 catch-up for ages 60 through 63. In exchange, the employer must fund one of two required contribution formulas every year the plan runs, either a dollar-for-dollar match up to 3% of pay or a flat 2% nonelective contribution for every eligible employee. The setup is lighter than a 401(k), but the employer contribution is not optional.

What Is a SIMPLE IRA?

A SIMPLE IRA is a salary-deferral retirement plan built for small employers, and it is only available to businesses with 100 or fewer employees.

The name stands for Savings Incentive Match Plan for Employees, and the framework is set out in Internal Revenue Code section 408(p). An employee elects to defer part of each paycheck into an individual retirement account (IRA) opened in that employee’s own name, and the employer adds a required contribution on top.

Each eligible employee holds a separate account with a financial institution the employer selects, so there is no single pooled trust the way a 401(k) plan works. That structure is what keeps the administrative load lower than a traditional 401(k), which is the main reason small businesses choose a SIMPLE IRA in the first place. It comes with a tradeoff: the employer contribution described later in this guide is mandatory every year the plan is offered, unlike a 401(k) match, which a plan sponsor can suspend.

Does Your Business Qualify to Offer One?

Your business qualifies to offer a SIMPLE IRA only if it has 100 or fewer employees who earned at least $5,000 in compensation in the prior year.

The Internal Revenue Service states the rule directly in its SIMPLE IRA plan guidance: an employer is ineligible to adopt a SIMPLE IRA plan once it has more than 100 employees who earned at least $5,000 in compensation in the prior year. That 100-employee count looks at every employee who crossed the $5,000 threshold, not just the ones who would actually participate in the plan.

This test runs every year, so a business that grows past the 100-employee threshold can lose eligibility for future plan years even after a SIMPLE IRA is already in place. The rule is written around headcount and prior-year pay, not around industry, entity type, or whether the business is incorporated, so sole proprietors, partnerships, and corporations are all measured the same way.

Which Employees Must Be Eligible?

An employee generally must be allowed to participate if they earned at least $5,000 from you in any two prior years and are reasonably expected to earn at least $5,000 this year.

That two-part test, both years-worked and current-year expectation, comes from the IRS’s own SIMPLE IRA plan page, and it applies whether the employee is full-time, part-time, or seasonal. An employer can choose less restrictive eligibility rules, such as dropping the prior-years requirement, but cannot set the bar any higher than the federal standard.

Because the eligibility test is about earned compensation and not job title or hours scheduled, a small business with a mix of full-time and part-time staff needs to check each worker’s pay history against the $5,000 threshold rather than assuming eligibility tracks with employment status.

How Much Can Employees Defer in 2026?

Eligible employees can defer up to $17,000 of salary into a SIMPLE IRA in 2026, with additional catch-up amounts available once they turn 50.

The standard 2026 age-50 catch-up is $4,000, and employees ages 60 through 63 get an enhanced catch-up of $5,250 instead, a provision added under SECURE 2.0. Each catch-up applies on top of the $17,000 base deferral, so a worker in the eligible age band adds the applicable catch-up amount to that base.

IRS guidance for 2026 also references a higher deferral figure, $18,100, and a smaller catch-up figure, $3,850, that apply to plans of what the agency calls “certain small employers.” The exact conditions that make a plan eligible for those higher numbers are not spelled out with enough precision in the guidance to state here as settled fact, so treat the $17,000 base deferral and the $4,000 standard catch-up as the reliable figures for planning purposes, and confirm with your plan administrator or tax professional whether your specific plan qualifies for the higher amounts before relying on them.

What Must the Employer Contribute?

The employer must fund one of two required formulas every year the SIMPLE IRA plan is active, either a dollar-for-dollar match up to 3% of compensation or a flat 2% nonelective contribution for every eligible employee.

Under the first formula, the employer matches each employee’s own salary-reduction contribution dollar-for-dollar, up to 3% of that employee’s compensation, and the match is not capped by the annual compensation limit. Under the second formula, the employer instead contributes 2% of compensation for every eligible employee, whether or not that employee defers any salary at all, and that 2% is calculated on compensation up to a $360,000 cap for 2026.

The employer chooses one formula for the plan year and applies it uniformly, so an owner cannot match one employee at 3% while paying another a 2% nonelective contribution in the same year. Because the 2% nonelective formula applies to every eligible employee regardless of participation, it can produce a meaningfully larger total employer cost in a workforce where deferral participation is low.

How Do You Set Up a SIMPLE IRA Plan?

Setting up a SIMPLE IRA starts with adopting a written plan through a bank, insurance company, or other financial institution that offers SIMPLE IRA accounts, then giving eligible employees the chance to open their own accounts.

The IRS SIMPLE IRA plan page frames the sponsor’s role as adopting the plan and selecting the financial institution, while each eligible employee separately establishes an individual SIMPLE IRA to receive contributions.

Because the setup touches payroll withholding, plan documentation, and ongoing employer contribution obligations, most small employers work with a financial institution or benefits administrator experienced in SIMPLE IRA plans, and route the payroll mechanics through a tax professional. Tools like a contribution tracker can help an owner keep deferral elections and the required employer contribution formula reconciled against payroll each pay period once the plan is live.

SIMPLE IRA vs. 401(k): Which Fits a Small Business?

A SIMPLE IRA generally fits a smaller business that wants a lighter-administration plan, while a 401(k) fits a business willing to take on more complexity in exchange for higher contribution ceilings and plan design flexibility.

The 2026 elective deferral limit for a 401(k) is $24,500, well above the $17,000 SIMPLE IRA deferral, and a 401(k) plan can add features a SIMPLE IRA cannot, such as employer discretion over whether to match in a given year and, for a business structured as a sole proprietorship, a Solo 401(k) design.

A SIMPLE IRA trades that flexibility for simplicity: no separate trust document, no annual nondiscrimination testing of the kind larger 401(k) plans face, and a mandatory but predictable employer contribution formula. A business that has outgrown the 100-employee threshold, or wants the higher 401(k) deferral ceiling for owners and highly paid staff, generally moves toward a 401(k) instead. A business set up by a self-employed owner without other employees may also want to compare a SIMPLE IRA against a SEP IRA, which uses an entirely different, employer-only contribution structure.

Frequently Asked Questions

These are the questions small-business owners ask most often before adopting a SIMPLE IRA plan.

What is a SIMPLE IRA?

A SIMPLE IRA is a salary-deferral retirement plan for employers with 100 or fewer employees. Eligible employees defer part of their salary into an individual retirement account, and the employer adds a required contribution using one of two formulas set by the IRS.

Who is eligible to participate in a SIMPLE IRA?

Generally, any employee who earned at least $5,000 from the employer in any two prior years and is reasonably expected to earn at least $5,000 in the current year must be allowed to participate. Employers can loosen this test but cannot make it stricter than the federal standard.

What are the SIMPLE IRA contribution limits for 2026?

Employees can defer up to $17,000 in 2026. Those 50 and older get an additional $4,000 catch-up, and those ages 60 through 63 get a $5,250 catch-up instead. IRS guidance also lists higher figures for plans of certain small employers, but the exact eligibility conditioning for those higher figures is not settled here, so confirm applicability with a plan administrator.

Is a SIMPLE IRA better than a 401(k) for a small business?

Neither plan is universally better. A SIMPLE IRA generally suits a smaller employer that wants lower administrative overhead and is comfortable with a mandatory employer contribution. A 401(k) suits a business that wants a much higher deferral ceiling, currently $24,500 for 2026, and more plan design flexibility, at the cost of more administration.

How does a small business set up a SIMPLE IRA?

The employer adopts a written plan through a bank, insurance company, or other qualifying financial institution, then each eligible employee opens an individual SIMPLE IRA to receive contributions. Because payroll withholding and the employer contribution formula both have compliance requirements, most small employers set this up with a financial institution and a tax professional rather than handling it entirely in-house.

This overview is educational information, not individualized tax, legal, or financial advice. Always consult your own legal, financial, and tax professionals before opening or changing a retirement account for your business or its employees.

By Tim Schmidt + Sean Webster Reviewed by Sean Webster