Is This the Right First Retirement Plan for Your Small Business Team?

SIMPLE IRA Basics: Is It the Right First Retirement Plan for Your Team?

Introduction

When a small business grows beyond its owner and adds employees, it may need to offer benefits. And the business founder might want to offer something meaningful without taking on the burden of a traditional 401(k). That’s where a SIMPLE IRA comes into the picture. 

It's a retirement savings arrangement created for smaller employers. Smaller businesses may hesitate to establish a retirement plan because of cost and administrative responsibilities. 

A SIMPLE IRA is different from other workplace retirement arrangements. So, the question that often arises is, “Is it the right first retirement plan for your business?” 

What Is a SIMPLE IRA and How Does It Work? 

SIMPLE stands for Savings Incentive Match Plan for Employees. It is an employer-sponsored retirement arrangement that allows eligible employees to contribute through salary reductions. Employers are generally required to make contributions for eligible employees. Contributions are deposited into individual retirement accounts established for participating employees. Investments grow tax-deferred, with taxation generally occurring when distributions are taken.

Employees elect to defer part of their compensation into their SIMPLE IRA.

Employers generally choose between a matching contribution arrangement and a non-elective contribution arrangement, subject to IRS rules.

Why Small Businesses Often Choose a SIMPLE IRA 

SIMPLE IRAs for a small business involve less administrative complexity than traditional 401(k) plans. No annual Form 5500 filing is required. SIMPLE IRAs are generally exempt from the annual reporting requirement that applies to many qualified retirement plans.

Workers can build retirement savings through automatic payroll deductions. Businesses can offer a retirement benefit while following a relatively predictable contribution structure. Retirement benefits can strengthen an overall compensation package.

Who Is Eligible to have a SIMPLE IRA?

For a small business, eligibility for a SIMPLE IRA requires that the business have 100 or fewer employees who received at least $5,000 in compensation during the preceding calendar year.

It does not maintain another employer-sponsored retirement plan during the same year. Meets the applicable employee participation requirements.

Employees generally must be included if they received at least $5,000 in compensation from the employer during any two preceding calendar years and are reasonably expected to receive at least $5,000 in the current calendar year. Employers can adopt less restrictive eligibility requirements.

Eligibility rules can affect part-time workers and employees with shorter service histories. Employers should not assume that only full-time employees qualify.

SIMPLE IRA Contribution Limits: What Can Employers and Employees Put Away? 

The 2026 limits for the retirement plan are:

Eligible employers may qualify for higher SIMPLE IRA salary reduction limits under SECURE 2.0, depending on their size and plan provisions. The applicable 2026 limit can be $18,100 for qualifying employers with 25 or fewer employees.

Generally, a dollar-for-dollar match of employee contributions up to 3% of compensation. Generally, 2% of compensation for each eligible employee, regardless of whether that employee contributes.

If an employee earns $50,000 and contributes 3% of their salary, a 3% employer match would provide another $1,500 annually. Employer contributions are mandatory under the applicable formula, rather than discretionary bonuses.

SIMPLE IRA vs. 401(k): Which Is Better for a Growing Business? 

A SIMPLE IRA may make sense if:

• A small company introducing retirement benefits for the first time.
• An employer seeking relatively straightforward administration.
• A business comfortable with mandatory employer contributions.

A 401(k) might be preferable when the business wants higher employee contribution limits, more plan design flexibility, or additional features.

The Downsides Employers Should Understand Before Signing Up 

Businesses must budget for the applicable matching or nonelective contribution. Employees may want to save more than the plan permits. Employees cannot borrow against their SIMPLE IRA balances. Distributions before age 59½ generally face an additional 10% tax, potentially increasing to 25% during the first two years of participation, subject to exceptions. Employers have fewer customization options than with some 401(k) arrangements.

SIMPLE IRA contributions are immediately 100% vested, meaning employees own their contributions and employer contributions without a vesting schedule.

How to Set Up a SIMPLE IRA for Your Business 

1. Check eligibility: Confirm the business meets IRS requirements.
2. Choose the contribution method: Decide between the matching and nonelective contribution arrangements.
3. Select a financial institution: Identify an appropriate IRA custodian or provider.
4. Complete the plan documentation: Adopt the appropriate SIMPLE IRA plan document.
5. Notify employees: Provide the required annual notice and explain contribution options.
6. Establish employee accounts: Ensure eligible employees have individual SIMPLE IRA accounts.
7. Coordinate payroll: Set up salary deductions and establish a reliable contribution deposit process.

Is a SIMPLE IRA the Right First Retirement Plan for Your Team? 

A SIMPLE IRA may be a strong fit for:

• Small businesses introducing their first workplace retirement benefit.
• Employers looking for a relatively straightforward plan.
• Companies that can comfortably accommodate mandatory contributions.
• Teams that want employees to build retirement savings through payroll deductions.

However, businesses anticipating rapid growth or employees seeking higher contribution limits may want to compare a SIMPLE IRA with a traditional 401(k), SEP IRA, or other available retirement arrangements.

Conclusion

Offering retirement benefits does not have to mean adopting the most complicated plan available. A SIMPLE IRA can give smaller employers a manageable way to help employees save for retirement while establishing a foundation for future benefits.