What Is the Maximum Contribution for a SIMPLE IRA?

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a retirement savings option designed primarily for small businesses. This plan allows both employees and employers to contribute to traditional IRAs established for employees. It offers a straightforward approach to retirement savings, making it a practical choice for employers seeking to provide a retirement benefit without extensive administrative complexities.

Employee Elective Deferral Limits

Employees participating in a SIMPLE IRA plan can make elective deferrals, which are contributions deducted directly from their salary. For the 2025 tax year, the standard annual dollar limit for these elective deferrals is $16,500. Some employees in businesses with 25 or fewer employees, or those with 26 to 100 employees where the employer makes a 4% matching or 3% non-elective contribution, may be able to defer up to $17,600.

Individuals aged 50 and over by the end of the calendar year are eligible to make additional “catch-up contributions.” For 2025, the standard catch-up contribution is $3,500, allowing eligible employees aged 50 and older to contribute a total of $20,000. For employers with 25 or fewer employees, an increased catch-up contribution of $3,850 may apply for those age 50 and over. These deferral limits apply to each individual, regardless of their participation in multiple SIMPLE IRA plans.

Employer Contribution Requirements

Employers sponsoring a SIMPLE IRA plan are required to make annual contributions to their employees’ accounts. There are two primary contribution options available to the employer. One option is a matching contribution, where the employer matches employee elective deferrals dollar-for-dollar, generally up to 3% of the employee’s compensation. This 3% matching contribution can be reduced to a minimum of 1% in two out of any five years, providing some flexibility for the employer.

The alternative employer contribution option is a non-elective contribution, which amounts to 2% of each eligible employee’s compensation. This 2% contribution must be made for all eligible employees, even if an employee chooses not to make their own elective deferrals. When calculating these contributions, there is an annual compensation limit, which is $350,000 for 2025.

These employer contributions are made in addition to any employee elective deferrals and do not count towards the employee’s individual deferral limit. Employers must select one of these contribution methods each year and communicate their choice to employees before the annual election period.

Exceeding Contribution Limits

Exceeding SIMPLE IRA contribution limits can result in adverse tax implications. An excess contribution occurs if an employee defers more than the allowed annual limit or if an employer contributes beyond the permissible percentages. For employees, excess deferrals are considered taxable income in the year they were contributed and may face taxation again if not corrected before distribution. Additionally, a 6% excise tax is imposed annually on any uncorrected excess amounts that remain in the IRA.

For employers, exceeding contribution limits or failing to administer the plan correctly can lead to penalties and potentially jeopardize the plan’s qualified status. Correcting excess employee deferrals involves distributing the excess amount, along with any earnings, back to the employee. This distribution should be completed by the employee’s tax filing deadline, including extensions, to mitigate further tax consequences.

In cases of excess employer contributions, the over-contributed amount is returned to the plan sponsor, rather than being distributed to the employee. This return to the employer is not considered taxable income for the employee. Timely correction of any excess contributions is important to maintain compliance with retirement plan regulations.