Are Bonuses Subject to SIMPLE IRA Contributions?

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a retirement savings plan designed for small employers, typically those with 100 or fewer employees. A common question for both employers and employees regarding these plans centers on what types of income are considered eligible for contributions. Understanding whether bonuses are subject to SIMPLE IRA contributions is important for accurate planning and compliance.

Defining Eligible Compensation for SIMPLE IRA Contributions

The Internal Revenue Service (IRS) provides specific guidance on what constitutes eligible compensation for SIMPLE IRA plans. Eligible compensation generally includes an employee’s total wages, salaries, tips, commissions, and other earned income that is subject to federal income tax withholding.

Bonuses are generally included as eligible compensation for SIMPLE IRA purposes. This means any bonus payments an employee receives are added to their regular wages when calculating the base amount for both employee and employer contributions. The IRS specifies that compensation for non-self-employed individuals refers to amounts reported as wages, tips, and other compensation subject to income tax withholding, as detailed in Internal Revenue Code Section 3401, along with elective contributions made under the SIMPLE IRA plan itself.

While bonuses are included, certain income types are excluded from eligible compensation for SIMPLE IRA purposes. These exclusions can include deferred compensation, welfare benefits, and other non-cash benefits. The precise definition of compensation for a specific SIMPLE IRA plan should be outlined in the plan document. Employers must adhere to this definition for correct calculation of deferrals and contributions and to maintain IRS compliance.

Impact of Compensation on Employee Elective Deferrals

The amount an employee can elect to contribute to their SIMPLE IRA is directly tied to their eligible compensation, which includes bonuses. Employees can choose to defer a percentage of their compensation or a specific dollar amount, up to annual limits set by the IRS. When bonuses are part of an employee’s compensation, they increase the total base upon which these deferral calculations are made.

For 2025, the standard annual limit for employee elective deferrals into a SIMPLE IRA is $16,500. Employees aged 50 and over are eligible to make additional “catch-up” contributions. In 2025, the catch-up contribution for those aged 50-59 and 64 and older is an additional $3,500, bringing their total possible deferral to $20,000. A new, higher catch-up contribution applies to employees aged 60 to 63 in 2025, allowing an additional $5,250, for a total deferral of $21,750.

For employers with 25 or fewer employees, or for those with 26-100 employees that elect to provide a higher employer contribution, the basic employee deferral limit for 2025 can be expanded to $17,600. This higher limit can similarly affect catch-up contributions for eligible employees. The inclusion of bonus income in eligible compensation means that employees can potentially defer a larger amount into their retirement accounts, up to these established limits, thereby maximizing their personal savings.

Impact of Compensation on Employer Contributions

Employer contributions to a SIMPLE IRA are mandatory and are directly affected by the definition of eligible compensation, including bonuses. Employers have two primary contribution options. The first is a dollar-for-dollar matching contribution, up to 3% of an employee’s compensation. This matching percentage can be reduced to a minimum of 1% for a maximum of two years within any five-year period, provided employees are notified in advance.

The second option is a non-elective contribution of 2% of each eligible employee’s compensation. This contribution must be made for all eligible employees, regardless of whether they choose to make their own elective deferrals. Both types of employer contributions are calculated based on the employee’s eligible compensation, up to an annual limit. For 2025, the maximum compensation that can be taken into account for calculating these contributions is $350,000.

If bonuses are included in an employee’s compensation, they increase the base used for calculating the employer’s required contribution. This means that an employer’s financial obligation to the SIMPLE IRA plan will rise proportionally with the total eligible compensation, including any bonus payments. Employer contributions to SIMPLE IRAs are tax-deductible for the business, offering a tax benefit while helping employees save for retirement.

Processing and Reporting SIMPLE IRA Contributions

Once eligible compensation is determined and contribution amounts are calculated, specific procedures govern the processing and reporting of SIMPLE IRA contributions. Employee elective deferrals, withheld from payroll, must be deposited into the employee’s SIMPLE IRA within 30 days after the end of the month in which the amounts would have been paid to the employee. This ensures timely funding of the retirement accounts.

Employer contributions, whether matching or non-elective, have a different deadline. These contributions must be made by the due date for filing the employer’s federal income tax return for the year, including any extensions. This allows employers flexibility in making their contributions while aligning with tax filing schedules.

For tax reporting, employee salary reduction contributions to a SIMPLE IRA are not included in Box 1 (“Wages, tips, other compensation”) of Form W-2, Wage and Tax Statement. However, these amounts are subject to Social Security and Medicare taxes and are included in Box 3 (“Social Security wages”) and Box 5 (“Medicare wages and tips”) of Form W-2. Additionally, Box 13 (“Retirement Plan”) on Form W-2 must be checked, and the total employee contribution is reported in Box 12 with Code “S.” IRA custodians are responsible for reporting contributions to the IRS on Form 5498, IRA Contribution Information, which is sent to the account holder by May 31 each year. This form provides a summary of contributions made for the calendar year they were deposited.