What Is an IRA Match and How Do Employer Contributions Work?

Employer contributions to retirement accounts play a role in an individual’s financial security. While many are familiar with 401(k) plans, employer contributions to Individual Retirement Accounts (IRAs), often called an “IRA match,” also exist. These contributions are distinct from a direct match to a personal Traditional or Roth IRA. Understanding how employers contribute to specific IRA plans is important for retirement planning.

Understanding Employer Contributions to Retirement Accounts

The concept of an employer “matching” contributions to an employee’s personal Traditional or Roth IRA is not how these arrangements function. Employers make contributions to specific types of IRAs established as part of a workplace retirement plan. These are distinct employer-sponsored IRA plans, not direct additions to an employee’s self-directed IRA. The term “IRA match” commonly describes employer-provided retirement benefits linked to an IRA structure.

Employer contributions to these plans help employees save for retirement beyond their personal contributions. These arrangements differ from traditional 401(k) plans in their administrative requirements and contribution structures, often making them suitable for smaller businesses. The contributions are a form of compensation that helps build an employee’s retirement savings. They provide a structured way for businesses to support their employees’ long-term financial goals.

Specific Employer-Sponsored IRA Plans

Two primary employer-sponsored IRA plans involve employer contributions: the Simplified Employee Pension (SEP) IRA and the Savings Incentive Match Plan for Employees (SIMPLE) IRA. These plans cater to different business sizes and offer varying contribution mechanisms.

A Simplified Employee Pension (SEP) IRA is an employer-sponsored retirement plan suitable for small businesses and self-employed individuals. In a SEP IRA, only the employer contributes to the plan on behalf of eligible employees. The employer determines the contribution amount each year, which can vary, including contributing nothing in a given year. Contributions are made to an individual SEP IRA account set up for each eligible employee.

The Savings Incentive Match Plan for Employees (SIMPLE) IRA is another retirement plan designed for small businesses, typically those with 100 or fewer employees. Unlike a SEP IRA, a SIMPLE IRA allows both employees and employers to contribute. Employees can make pre-tax contributions through payroll deductions, similar to a 401(k) plan. Employers are then required to make contributions, either through a matching formula or a fixed non-elective contribution.

Rules for Employer Contributions to IRAs

Employer contributions to both SEP and SIMPLE IRAs adhere to specific Internal Revenue Service (IRS) rules regarding contribution limits, employee eligibility, and vesting.

SEP IRA Rules

For SEP IRAs, the maximum employer contribution for 2024 is the lesser of 25% of an employee’s compensation or $69,000. In 2025, this limit increases to $70,000. Compensation considered for this calculation is capped at $345,000 for 2024 and $350,000 for 2025. Employers are not required to contribute every year, but if they do, the same percentage of compensation must be contributed for all eligible employees, including the owner.

Employee eligibility for SEP IRAs generally requires an individual to be at least 21 years old, have worked for the employer in at least three of the preceding five years, and have received at least $750 in compensation from the employer for the year. All employer contributions to a SEP IRA are immediately 100% vested, meaning the employee has full ownership of the funds as soon as they are contributed.

SIMPLE IRA Rules

For SIMPLE IRAs, employees can make pre-tax contributions up to $16,000 in 2024, with an additional catch-up contribution of $3,500 for those age 50 and older. For 2025, these limits are $16,500 and $3,500, respectively, with a $5,250 catch-up for those age 60 to 63. Employers must choose one of two contribution formulas: a dollar-for-dollar match up to 3% of the employee’s compensation, or a non-elective contribution of 2% of each eligible employee’s compensation, up to an annual compensation limit of $345,000 for 2024 and $350,000 for 2025. The employer can reduce the matching contribution to as low as 1% for no more than two out of every five years.

To offer a SIMPLE IRA, an employer must generally have 100 or fewer employees who earned at least $5,000 in the preceding calendar year and cannot maintain any other employer-sponsored retirement plan. Employees are typically eligible if they received at least $5,000 in compensation from the employer during any two preceding calendar years and expect to receive at least $5,000 in the current year. All employer contributions to a SIMPLE IRA are immediately 100% vested, providing employees with immediate ownership of the funds.

Tax Implications of Employer IRA Contributions

The tax treatment of employer contributions to SEP and SIMPLE IRAs offers benefits for both the employer and the employee.

For the Employer

Contributions made to both SEP and SIMPLE IRAs are generally tax-deductible business expenses. This deductibility can reduce the business’s taxable income. Contributions must be made by the due date of the employer’s federal income tax return, including extensions.

For the Employee

Employer contributions to SEP and SIMPLE IRAs are not considered taxable income in the year they are contributed. These funds grow on a tax-deferred basis, meaning taxes are not paid on investment gains until the money is withdrawn, typically in retirement. While pre-tax employee contributions to a SIMPLE IRA reduce current taxable income, they are still subject to Social Security, Medicare, and federal unemployment (FUTA) taxes. Withdrawals from both SEP and SIMPLE IRAs in retirement are taxed as ordinary income.