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What are the employer contribution limits for a SIMPLE IRA?

SIMPLE IRAs (Savings Incentive Match Plans for Employees) are a popular retirement savings option for small businesses, offering both simplicity and valuable tax benefits. One of the key requirements is that employers must contribute to each eligible employee’s plan, but they have flexibility in how they do it.

Employer Contribution Options

Employers are required to choose one of two contribution methods:

1. Matching Contributions (Dollar-for-Dollar Match up to 3%)

Employers must match the employee’s salary deferral dollar-for-dollar, up to 3% of compensation. This means the employer only matches what the employee chooses to contribute, and only up to the 3% limit.

If an employee contributes more than 3%, the employer is not required to match anything above 3%.

Employers are allowed to temporarily reduce the 3% matching percentage to as low as 1%, but only for two years within any five-year period. Employers must notify employees of the reduced limit within a reasonable time before the 60-day election period during which employees can enter into salary reduction agreements.

Example 1: Bob earns $60,000 per year and elects to defer 2% of his salary.

• His contribution = $1,200 (2% of $60,000)

• Since Bob’s employer is doing a dollar-for-dollar match, they also contribute $1,200

Example 2: Bob now decides to defer 5% of his salary, which equals $3,000.

• Despite the higher deferral, Bob’s employer still matches only up to 3%, contributing $1,800

 

2. Non-Elective Contributions (2% for All Eligible Employees)

Instead of matching employee contributions, employers can choose to contribute 2% of each eligible employee’s salary, regardless of whether the employee chooses to contribute to their SIMPLE IRA.

Example 1: John earns $60,000 and decides to contribute 5% to his SIMPLE IRA.

• Employee contribution = $3,000

• Employer contributes 2% of $60,000 = $1,200

Example 2: John earns $60,000 but chooses not to contribute to his SIMPLE IRA. However, since his employer has selected the 2% non-elective contribution option, they are still required to contribute $1,200 (2% of $60,000) to John’s account, regardless of his participation in the plan.