Can a New Employee Contribute to a SIMPLE IRA?
Navigate SIMPLE IRA participation for new hires. Discover how eligibility requirements, employee contributions, and employer duties apply to recent employees.
A Savings Incentive Match Plan for Employees Individual Retirement Account, known as a SIMPLE IRA, offers small businesses a streamlined way to provide retirement savings opportunities for their employees. This type of plan is designed to be less complex and less expensive to administer than larger retirement plans, making it a suitable option for many smaller employers. This article will clarify the participation rules, contribution mechanisms, and employer responsibilities associated with SIMPLE IRAs, especially as they pertain to new hires.
Eligibility for SIMPLE IRA Participation
For an employee to become eligible to participate in a SIMPLE IRA plan, specific criteria established by the Internal Revenue Service (IRS) must be met. Generally, an employee is eligible if they have received at least $5,000 in compensation from the employer during any two preceding calendar years. They must also reasonably expect to receive at least $5,000 in compensation from the employer in the current calendar year.
For new employees, this standard eligibility rule applies directly to their limited work history with the company. A new hire may not immediately satisfy the requirement of having earned $5,000 in two prior calendar years with the employer. This means that while their status as a “new employee” does not automatically exclude them, their eligibility depends on how quickly they meet the established compensation and prior-year service conditions.
Employers do have some flexibility to modify these standard eligibility requirements. A plan can be designed to allow immediate participation for all employees, or to include those who have earned compensation for a shorter period than the two-year look-back rule. However, any such exceptions must be clearly defined within the plan document and applied consistently to all employees.
Employee Contributions to a SIMPLE IRA
Once an employee becomes eligible to participate in a SIMPLE IRA, they can begin making their own contributions to the plan. These are known as elective deferrals, which are pre-tax contributions automatically deducted from the employee’s paycheck.
The IRS sets annual limits on the amount an employee can contribute to a SIMPLE IRA. For 2025, employees under age 50 can contribute up to $16,500. Employees aged 50 and older are permitted to make additional “catch-up” contributions, increasing their 2025 limit by an extra $3,500, for a total of $20,000. A further enhanced catch-up contribution of $5,250 is available for those aged 60 to 63 in 2025, due to the SECURE 2.0 Act.
The SECURE 2.0 Act also introduced higher deferral limits for employees of certain small businesses. For employers with 25 or fewer employees, or those with 26 to 100 employees who make specific employer contributions, the basic deferral limit for 2025 can be increased to $17,600, with a corresponding catch-up contribution of $3,850 for those aged 50 and older.
Employer Contributions and Responsibilities
Employers sponsoring a SIMPLE IRA plan have mandatory contribution obligations. Employers must choose one of two contribution formulas annually. The first option is a matching contribution, where the employer matches each employee’s salary reduction contributions dollar-for-dollar, generally up to 3% of the employee’s compensation. An employer can reduce this matching contribution to as low as 1% in no more than two out of any five years.
The second option is a non-elective contribution, where the employer contributes 2% of each eligible employee’s compensation, regardless of whether the employee makes their own contributions. For 2025, the compensation considered for this calculation is capped at $350,000. The employer must notify employees annually of which contribution method will be used for the upcoming year, typically within a 60-day election period immediately preceding January 1 (from November 2 to December 31).
Beyond contributions, employers have several administrative responsibilities. This includes establishing the plan, often using IRS model forms like Form 5304-SIMPLE or Form 5305-SIMPLE. Employers must also provide eligible employees with timely notice of their eligibility and the opportunity to make or modify their contribution elections.
Employee salary reduction contributions must be deposited into their SIMPLE IRAs no later than 30 days after the end of the month in which the amounts would have been payable to the employee. Employer contributions must be made by the due date for filing the business’s federal income tax return, including any extensions.