A SIMPLE IRA is a low-paperwork retirement plan that small employers use instead of a 401(k), and it works on three fixed rules: the business must have had no more than 100 employees earning $5,000 or more last year, employees who hit a modest earnings history must be allowed in, and the employer must contribute every single year. In exchange for that simplicity, you give up 401(k) features — there are no participant loans, and cashing out in the first two years costs 25% rather than 10%. "SIMPLE" stands for Savings Incentive Match Plan for Employees, and the plan is built on individual IRAs opened in each worker's name. That structure is why the money is yours the day it lands, and also why several 401(k) conveniences are unavailable.
Table of Contents
- Which employers can sponsor one
- Who the employer has to let in
- What you can contribute in 2026
- The employer contribution is mandatory
- The trade-offs against a 401(k)
- Setting one up, and the dates that control it
- Frequently Asked Questions
Which employers can sponsor one
The size test is the gate. According to the IRS guidance on SIMPLE IRA plans, any employer — a sole proprietor, a nonprofit, or a government entity — may sponsor a SIMPLE IRA only if it had no more than 100 employees who earned at least $5,000 in compensation during the preceding calendar year. That head count is broader than many owners expect.
Full-time, part-time, seasonal, and leased employees all count toward the 100, so a restaurant or landscaping business with heavy summer staffing can cross the line without adding a single salaried role. There is also an exclusivity rule. The IRS states that a SIMPLE IRA must generally be the employer's only retirement plan for the year. Two narrow exceptions exist: employees covered by a collective bargaining agreement can be excluded from the SIMPLE while covered by their union plan, and an acquisition or disposition in the current or two prior calendar years gets transition relief.
Who the employer has to let in
Eligibility turns on pay history, not on hours, job title, or tenure. The IRS SIMPLE IRA FAQs set the default rule: an employee must be allowed to participate if they received at least $5,000 in compensation during any two preceding calendar years and are reasonably expected to receive $5,000 in the current year. Two details matter to workers with broken service. The two prior years do not have to be consecutive, so someone who earned $5,000 in 2022, left, and returned in 2026 can still qualify.
And the employer may lower those dollar thresholds or drop them entirely — a business that wants everyone in from day one is free to do that. What an employer cannot do is invent extra hurdles. Beyond the compensation thresholds, no other participation conditions are permitted. There is no 1,000-hour rule, no age-21 rule, and no one-year waiting period to negotiate.
What you can contribute in 2026
Your own salary-reduction contributions — money withheld from your paycheck — are capped at $17,000 for 2026. The IRS 2026 cost-of-living release also sets a higher limit of $18,100, up from $17,600 in 2025, for what it calls applicable plans. Whether you get the higher number depends on your employer, not on you. It applies to employers with 25 or fewer employees, and to employers with 26 to 100 employees that elect to make a 4% match.
Ask your plan administrator which figure applies before you set a payroll election, because the two are $1,100 apart. Catch-up contributions add a second layer. Per the IRS, participants age 50 or over can add $4,000 in 2026, and employees who are 60, 61, 62, or 63 during the year can add $5,250 — but only if the plan permits catch-ups. That four-year band is a real planning window: someone turning 64 in 2026 does not qualify for the larger amount.
The employer contribution is mandatory
Every year, the employer must fund the plan by one of two routes, and choosing neither is not an option: The difference is meaningful for non-savers. Under the match, an employee who contributes nothing receives nothing. Under the 2% route, the money arrives regardless — which is why an employer with many low-deferral workers often finds the match cheaper and the 2% option more equitable.
📨 Get Free Medicare Guides Alerts
Free · No spam · Unsubscribe anytime
Two limits cap the employer's exposure. The IRS contribution limit rules allow the 3% match to be cut to as low as 1% in no more than 2 of any 5 consecutive years, and only compensation up to $360,000 for 2026 counts toward the calculation. A partner earning $500,000 is matched on $360,000 of it.
- A dollar-for-dollar match on what you defer, up to 3% of your pay.
- A 2% nonelective contribution to every eligible employee, paid whether or not that person defers anything.
The trade-offs against a 401(k)
Start with the advantage. All SIMPLE IRA contributions, yours and your employer's, are 100% vested immediately — the IRS treats them as owned by the employee from the moment they are deposited. There is no cliff or graded schedule to survive, so leaving after four months costs you nothing in forfeited employer money. Now the costs. IRA-based plans, including SEP, SIMPLE IRA, and SARSEP, cannot offer participant loans. If borrowing against retirement savings is part of your emergency plan, a SIMPLE IRA cannot deliver it, and a hardship withdrawal is a taxable distribution rather than a loan.
The sharpest trap is the two-year clock. Under the IRS withdrawal and transfer rules, the additional tax on an early withdrawal rises from 10% to 25% if you take the money within two years of first participating. During that same window, the balance can be moved only to another SIMPLE IRA; any other IRA transfer is treated as a taxable withdrawal unless you are 59½ or meet another exception. That rule catches people who change jobs. Rolling a five-month-old SIMPLE IRA into the traditional IRA you already hold is not a rollover during the window — it is a distribution, taxable, plus the 25% additional tax. Waiting out the clock, or rolling into a new employer's SIMPLE IRA, avoids it.
Setting one up, and the dates that control it
A new SIMPLE IRA can take effect on any date from January 1 through October 1. The only employers who get a later date are businesses that came into existence after October 1, which may start a plan as soon as administratively feasible after opening. That October 1 wall is the practical deadline for an owner deciding this year.
Miss it, and the plan's first effective date is January 1 of the following year — meaning no employer contribution and no employee deferrals for the remaining quarter. Employees get their own window. The IRS sets a 60-day election period, which normally runs from November 2 to December 31 for a calendar-year plan, during which workers choose whether to defer and how much. If you want the age-60-through-63 catch-up to apply to a year, your election has to be in place before that year's payroll begins.
Frequently Asked Questions
Can a part-time worker participate in a SIMPLE IRA?
Yes. Eligibility is measured in dollars, not hours — $5,000 in compensation in any two preceding calendar years plus an expectation of $5,000 this year. Part-time and seasonal staff also count toward the employer's 100-employee test, so they are visible to the plan on both sides.
Can my employer skip its contribution in a bad year?
No. The employer must fund the plan every year by one of the two routes. The only relief is trimming the 3% match to as low as 1%, and that is permitted in no more than 2 of any 5 consecutive years. The 2% nonelective contribution has no equivalent reduction.
You Might Also Like
- Social Security COLA 2026 Explained: Eligibility, Income, and Trade-Offs
- Pension Cost of Living Explained: Eligibility, Income, and Trade-Offs
- What Is New With IRA Retirement Planning in August 2026? Latest SSA, IRS, and plan documents and Key Takeaways