How SIMPLE IRA Non-Elective Contributions Work
Learn how a SIMPLE IRA non-elective contribution works, from its fixed 2% rate for all employees to its impact on a small business's finances.
A SIMPLE IRA allows small businesses to provide a retirement savings plan where employer contributions are required. Employers can choose between two contribution methods, with this article focusing on the non-elective contribution, a consistent way for employers to help their workforce save.
Understanding the Non-Elective Contribution
A non-elective contribution is a mandatory employer contribution made to every eligible employee’s SIMPLE IRA, regardless of whether the employee contributes their own money. The contribution is not optional for the employer once this method is selected for the year and is not dependent on any action from the employee.
The standard rate for this contribution is 2% of an employee’s compensation. For this calculation, compensation includes wages, salaries, tips, and bonuses. There is an annual cap on the amount of compensation that can be considered for this calculation, which is $350,000 for 2025.
For employers with more than 25 employees, there is an option to increase the non-elective contribution to 3% of compensation. This higher contribution is a requirement if the employer wishes to allow employees to contribute up to a higher annual limit.
This contribution must be made for every eligible employee. An eligible employee is one who has earned at least $5,000 in compensation during any two preceding years and is reasonably expected to earn at least $5,000 in the current year. Employers can use less restrictive eligibility rules, but not more restrictive ones. For example, an employee earning $60,000 would receive a $1,200 non-elective contribution.
Comparing to Employer Matching Contributions
The alternative to the non-elective contribution is an employer match. Under the standard matching formula, an employer contributes a dollar-for-dollar match on employee contributions up to 3% of compensation. For employers with more than 25 employees who want to allow higher employee savings limits, the required match increases to 4% of compensation. A distinction of the matching formula is that funds are only deposited for employees who contribute their own money to the plan.
Under the standard 3% matching formula, employers can reduce the contribution in certain years. The rate can be lowered to as little as 1% of compensation for up to two years within any five-year period. This option provides financial leeway for the business, a feature not available with the fixed non-elective contribution or the 4% matching option.
The non-elective contribution ensures every eligible employee receives a retirement benefit, and its cost is a predictable percentage of total eligible payroll. In contrast, the matching contribution’s total cost is variable, fluctuating based on how many employees decide to participate and how much they contribute.
Annual Requirements and Deadlines
Employers must follow specific annual timelines when administering a SIMPLE IRA plan. They must notify employees of the contribution method chosen for the upcoming year, whether it is the non-elective contribution or an employer match, before the plan year begins.
This information must be provided during the 60-day election period, which runs from November 2 to December 31. This notice allows employees to make or change their salary reduction choices for the year. The employer provides this information in a document called a SIMPLE Summary Description.
Once the year is complete, the employer must deposit the non-elective contributions into each employee’s SIMPLE IRA. These funds must be deposited by the due date of the employer’s federal income tax return, including any extensions.
Tax Implications for Employers and Employees
Contributions to a SIMPLE IRA have tax consequences for both the business and its workforce. For the employer, all contributions are treated as a business expense and can be deducted on the company’s federal income tax return, reducing the business’s taxable income.
For employees, the employer’s non-elective contributions are not considered part of their gross income for the tax year. These funds, along with any personal contributions, grow on a tax-deferred basis, so no taxes are paid on investment earnings as they accumulate. Taxes are paid only when the employee withdraws the money, usually during retirement.
The employer’s contribution does not reduce the amount an employee is allowed to contribute from their own salary. For 2025, the annual contribution limit for employees under age 50 depends on the employer’s size. For businesses with 25 or fewer employees, the limit is $17,600. For larger employers, the limit is $16,500, though they may offer the higher limit if they make increased employer contributions.