Are SIMPLE IRAs Subject to ERISA?

SIMPLE IRA plans offer a straightforward retirement savings solution, particularly for smaller businesses. The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law designed to safeguard private retirement and welfare plans. This article explores SIMPLE IRA plans, provides an overview of ERISA, and clarifies their relationship to ERISA’s regulatory framework, aiding employers in compliance.

Basics of SIMPLE IRA Plans

A Savings Incentive Match Plan for Employees Individual Retirement Account (SIMPLE IRA) is a retirement plan for small businesses, including self-employed individuals, generally eligible if they had 100 or fewer employees earning at least $5,000 in the preceding year and do not maintain another qualified retirement plan. These plans are favored for their lower administrative costs and simpler setup compared to other retirement options like 401(k)s.

Employee eligibility for a SIMPLE IRA includes those who received at least $5,000 in compensation from the employer in any two preceding calendar years and are expected to receive at least $5,000 in the current year. Employees can contribute a portion of their salary, known as elective deferrals, up to an annual limit adjusted for inflation. For example, in 2025, employees can contribute up to $16,500, with an additional catch-up contribution of $3,500 allowed for those aged 50 or older.

Employers are required to make contributions to employee accounts, choosing one of two formulas: either a dollar-for-dollar matching contribution up to 3% of the employee’s compensation, or a non-elective contribution of 2% of each eligible employee’s compensation, regardless of whether the employee defers salary. These employer contributions are immediately 100% vested, meaning employees have full ownership of the funds from the moment they are contributed. SIMPLE IRA plans run on a calendar-year basis, and changes to the plan, such as contribution percentages, become effective on January 1st of the new plan year.

Overview of ERISA

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law establishing minimum standards for most private retirement and health plans. Its purpose is to protect plan participants and beneficiaries by setting rules for plan management, including reporting, disclosure, and fiduciary responsibilities.

ERISA’s broad scope covers various employee benefit plans, including pension plans, 401(k)s, and certain health and welfare plans. The law requires plans to provide participants with information on features, funding, and benefits, and sets requirements for participation, vesting, and benefit accrual.

ERISA mandates fiduciary responsibility. Anyone who exercises discretionary authority or control over a plan’s management or assets is considered a fiduciary and must act solely in the best interests of the plan participants and beneficiaries. ERISA also includes enforcement mechanisms, giving participants the right to sue for benefits and breaches of fiduciary duty. However, ERISA generally does not cover plans established by governmental entities or churches.

ERISA Applicability to SIMPLE IRAs

SIMPLE IRA plans are generally exempt from most Title I provisions of ERISA, covering reporting, disclosure, and fiduciary responsibilities. This makes them simpler and less burdensome for small businesses than other ERISA-covered plans. However, this conditional exemption requires strict adherence to specific rules.

For a SIMPLE IRA plan to be exempt from most ERISA Title I requirements, the employer’s involvement must be limited. The employer’s only role should be to make the required contributions (either matching or non-elective) and to allow employees to choose a financial institution for their individual SIMPLE IRA accounts.

All contributions, whether from employee salary deferrals or employer contributions, must be deposited into an individual retirement account or annuity established for each employee. Furthermore, the employer must not impose any conditions on withdrawals from the SIMPLE IRA, nor can they restrict an employee’s ability to transfer funds between financial institutions. The employer is also required to provide an annual notice to employees about their rights and responsibilities under the plan before the annual election period (November 2 to December 31). If these conditions are not met, the SIMPLE IRA plan could inadvertently become subject to the full scope of ERISA’s Title I regulations, leading to significant compliance obligations. While most of Title I is exempt, other aspects of the Internal Revenue Code, such as those related to tax qualification and certain protections like the anti-alienation rule (which protects funds from creditors), still apply to SIMPLE IRAs.

Employer Responsibilities for SIMPLE IRA Plans

Even with the general ERISA exemption, employers offering a SIMPLE IRA plan have ongoing responsibilities to ensure the plan’s continued compliance and tax-qualified status. A primary responsibility involves the timely deposit of contributions.

Employee salary deferrals must be deposited into the employee’s SIMPLE IRA account as soon as administratively feasible, but no later than 30 days after the end of the month in which the amounts would otherwise have been payable to the employee. Employer contributions (matching or non-elective) must be made by the due date for filing the employer’s federal income tax return for the tax year, including extensions. Failing to meet these deadlines can result in penalties and corrective actions.

Employers must also provide an annual notice to eligible employees. This notice, due before November 2 each year, informs employees of their opportunity to make or change salary reduction elections, the employer’s contribution choice (matching or non-elective), and their ability to select a financial institution if the plan allows. This annual communication ensures employees are aware of their plan options and rights. Additionally, employers must ensure that all eligible employees are offered the opportunity to participate in the plan.