Chapter 7 — Participation & Contributions

The tax code requires a SIMPLE plan to be available to every employee who meets both of the following conditions:

• received at least $5,000 in compensation from the employer during any two preceding calendar years, and
• is reasonably expected to receive at least $5,000 in compensation during the current year.

The two preceding years need not be consecutive — any two years in the employee’s history with the employer count. This means a part-time employee who earned $5,000 in two separate years but not in between could still qualify. An employer may establish a SIMPLE plan even if none of its current employees wish to participate, provided it notifies all eligible employees of the opportunity.

An employee may participate in a SIMPLE plan even if they also participate in a retirement plan of a different employer during the same year.

Employers may adopt participation requirements that are less restrictive than the statutory minimums — for example, covering all employees immediately with no compensation history requirement. The employer’s chosen thresholds are indicated on Form 5305-SIMPLE (for SIMPLE IRAs) or in the 401(k) plan document.

Employers may exclude the following employees from SIMPLE plan participation:

• Nonresident aliens who have no U.S. source income, and
• employees covered by a collective bargaining agreement whose retirement benefits were subject to good-faith bargaining.

Note: these excluded employees must still be counted when determining whether the employer qualifies under the 100-employee rule.

Self-employed individuals are eligible to participate in a SIMPLE plan as both employer and employee. They may make elective deferrals based on net self-employment income and are also responsible for making the mandatory employer contribution.

Two types of contributions are permitted under a SIMPLE plan:

• Elective deferrals — contributed by the employee through a salary reduction agreement, and
• Mandatory employer contributions — either matching or non-elective (the employer must choose one formula and apply it for the entire plan year).

Employees may elect to defer up to the following annual limits through a salary reduction arrangement:

The contribution formula in a SIMPLE plan is expressed as a percentage of compensation, not a flat dollar amount. As a result, not every employee will be able to contribute the full maximum — an employee’s actual deferral is limited to the percentage of compensation they elect, subject to the annual ceiling.

SIMPLE plan deferral limits are higher than regular IRA limits ($7,500 in 2026) but lower than regular 401(k) limits ($24,500 in 2026). SIMPLE deferrals reduce the amount available for elective contributions to other plans such as 401(k)s, TSAs, and SARSEPs under the aggregate deferral limit.

SIMPLE plans require employers to make a mandatory annual contribution. The employer must choose one of two formulas and apply it consistently for the full plan year:

Under the matching formula, the employer matches each eligible employee’s elective deferral on a dollar-for-dollar basis up to 3% of the employee’s compensation.

• SIMPLE IRA matching: The employee’s actual total compensation is used to calculate the maximum match — there is no compensation cap for the matching calculation.
• SIMPLE 401(k) matching: Only the first $360,000 of compensation (2026, inflation-adjusted) may be considered. This means the maximum employer matching contribution for any one employee in a SIMPLE 401(k) is 3% × $360,000 = $10,800.

In a SIMPLE IRA (but not a SIMPLE 401(k)), the employer may choose to reduce the matching rate below 3% — but to no lower than 1% — for a given year. Two conditions apply:

• The employer must notify employees of the lower rate within a reasonable period before the 60-day election window during which employees decide whether to participate.
• The employer may not use a rate below 3% in more than two of any consecutive five years.

A matching formula requires a contribution every year. If an employee makes elective deferrals, the employer must match them (at whatever the applicable rate is for that year). The employer cannot simply choose not to contribute due to financial difficulties.

Under the non-elective formula, the employer contributes 2% of compensation for every eligible employee who participated during the year — regardless of whether the employee makes any elective deferral. The employer must contribute for all eligible employees, not just those who choose to defer.

For both SIMPLE IRAs and SIMPLE 401(k)s using the non-elective formula, compensation is capped at $360,000 (2026) per employee. The maximum non-elective contribution per employee is 2% × $360,000 = $7,200.

The employer must notify each eligible employee of the non-elective contribution formula before the 60-day election period begins.

The mandatory nature of SIMPLE plan contributions and the contribution ceilings can make SIMPLE plans less attractive for small business owners who want to maximize their own retirement savings:

• An owner whose income significantly exceeds that of employees may prefer a Keogh or 401(k) plan that allows higher annual contributions on their own behalf.
• Businesses with fluctuating profits must still make SIMPLE plan contributions in lean years — at a minimum, matching at least 1% of employee compensation.

The overall limit on all elective deferrals across all plans is $24,500 (2026) for ages under 50, or higher with applicable catch-ups. SIMPLE plan deferrals reduce the amount an employee may defer to other elective plans (401(k)s, 403(b)s, SARSEPs) in the same year. A SIMPLE plan deferral of $17,600 leaves only $6,900 of room in other elective plans for an employee under age 50.

For SIMPLE 401(k) plans, the total annual additions limit applies — the lesser of 100% of compensation or $72,000 (2026). Employers may not circumvent this overall defined contribution limit through a SIMPLE 401(k) arrangement.

Employers may deduct all SIMPLE plan contributions — including the employee elective deferrals (which are treated as employer contributions for deduction purposes) — for the year in which they are made, subject to these rules:

• Employee elective deferrals are deductible in the tax year the contributions are made.
• Employer matching or non-elective contributions are deductible for the tax year, provided they are deposited by the employer’s tax return due date including extensions.
• Since SIMPLE plans operate on a calendar year, if the employer uses a fiscal year the deduction is taken in the fiscal year in which the calendar plan year ends.

All contributions to a SIMPLE plan — both employee elective deferrals and employer contributions — are excluded from the employee’s federal income for the year. However:

• Employee elective deferrals to a SIMPLE plan are subject to FICA (Social Security and Medicare) and FUTA (federal unemployment) taxes and must be reported on the employee’s W-2.
• Employer contributions (matching or non-elective) are not subject to FICA or FUTA and need not be reported on the employee’s W-2.

Eligible employees participate in a SIMPLE plan through a salary reduction election. The IRS requires a minimum 60-day window during which employees may elect to contribute — or modify their existing election. Typically this window is the 60-day period ending December 31 (November 2 through December 31) so the election takes effect for the upcoming plan year.

Plans may expand this window. Some plans offer up to 90 days; others offer a 30-day window at the start of each quarter. During the window, employees decide whether to contribute and in what amount.

The employer must provide each eligible employee with advance notice before the election window opens, indicating:

• the employee’s right to make elective contributions, and
• the type and level of employer contributions for the upcoming year (matching formula with rate, or non-elective at 2%).

Employees may terminate their participation in a SIMPLE plan by discontinuing their elective deferrals at any time during the calendar year. However, the employer may restrict a terminated participant from resuming participation until the beginning of the following year.

Employee elective contributions must be deposited as quickly as possible after withholding:

• SIMPLE 401(k): Employee deferrals must be deposited no later than 15 days after the end of the month in which the amounts were withheld from compensation.
• SIMPLE IRA: Employee deferrals must be deposited within 30 days after the end of the month.

If an eligible employee has not yet established a SIMPLE IRA by the 30-day deadline, the employer may establish a SIMPLE IRA on the employee’s behalf with a financial institution of the employee’s choosing.

Employer matching or non-elective contributions must be deposited by the employer’s tax return due date including extensions (see Campbell Electronics example above).

All contributions to a SIMPLE account — both employee elective deferrals and employer matching or non-elective contributions — are immediately and 100% vested from the moment they are deposited. All amounts may be withdrawn by the employee at any time, subject to ordinary income tax and applicable early withdrawal penalties.