Congress Makes SIMPLE IRA Plans Less Simple
SIMPLE IRA plans have long been a go-to option for small business retirement planning. Their appeal stems from ease of administration and fewer compliance headaches compared to traditional 401(k) plans. But new legislation passed under the SECURE 2.0 Act of 2022 is making SIMPLE IRAs more complicated starting in 2024.
These changes impact contribution limits, employer match formulas, and optional new contributions. Small business owners need to understand how the updated rules will affect payroll planning, retirement benefits, and compliance.
Who Can Offer a SIMPLE IRA?
SIMPLE IRA (Savings Incentive Match Plan for Employees) plans are available to employers with 100 or fewer employees who each earned at least $5,000 in compensation during the prior year. These plans allow both employees and employers to contribute, but are simpler to maintain than qualified plans like 401(k)s.
Employers can establish a SIMPLE IRA using IRS Form 5304-SIMPLE or 5305-SIMPLE, depending on whether employees can choose their own financial institution.
How SIMPLE IRAs Normally Work
SIMPLE IRAs allow two types of contributions:
- Elective deferrals by employees (salary reduction contributions)
- Employer contributions, which can be either:
- A match up to 3% of pay
- A non-elective 2% of pay to all eligible employees, regardless of deferrals
These plans are meant to be straightforward. But beginning in 2024, Congress is adding complexity in three major areas.
1. Higher Contribution Limits for Smaller Businesses
Until now, SIMPLE IRA contribution limits were uniform regardless of company size.
In 2023:
- The elective deferral limit was $15,500 for participants under age 50
- The catch-up contribution (age 50 or older) was $3,500
The IRS announced that for 2024:
- The base limit increases to $16,000
- The catch-up contribution remains at $3,500
But under SECURE 2.0, starting in 2024, businesses with 25 or fewer employees get a 10% increase on both limits:
- New under-50 limit: $17,600
- New catch-up limit: $3,850
This increase offers greater savings potential for employees at smaller firms. However, it adds a layer of calculation and eligibility tracking for employers and payroll providers.
2. Conditional Increases for Employers with 26–100 Employees
Employers with 26 to 100 employees don’t get the increased contribution limits automatically.
To offer the enhanced limits, they must increase their employer contribution. They have two options:
- Match 4% of pay instead of 3%
- Offer 3% non-elective contributions instead of 2%
This gives mid-size small businesses a choice: either maintain current match levels and stick with lower deferral limits or increase the employer contribution to unlock the higher deferral limits.
For example, an employer with 70 employees who wants to offer the $17,600 limit must either:
- Match 4% on employee deferrals, or
- Contribute 3% of pay to all eligible employees
This adds complexity to employer decision-making and budgeting.
3. New Optional Employer Contribution Up to 10% of Pay
Starting in 2024, employers may add a completely new optional contribution, separate from the standard match or non-elective contribution.
Here’s how it works:
- The contribution is across the board (not dependent on employee deferrals)
- It applies only to employees who earn at least $5,000 for the year
- It can be up to 10% of pay, but capped at $5,000 per employee
- Employers can offer this even if they already make the required match or 2% contribution
This optional contribution can boost retirement savings but also increases employer cost. Businesses will need to assess whether this additional benefit aligns with cash flow and employee retention goals.
SIMPLE IRAs vs. SEP IRAs: Not the Same
Although both SIMPLE and SEP IRAs are designed for small businesses, they operate under different rules:
- SIMPLE IRAs allow employee deferrals and require employer contributions
- SEP IRAs are funded only by employers
- SIMPLE IRAs have lower contribution limits but allow salary deferrals
- SEP IRAs allow higher limits but offer less flexibility for employees
The 2024 changes apply only to SIMPLE IRAs, not SEP IRAs.
Who Should Pay Attention to These Changes?
These rule changes affect:
- Small business owners who sponsor SIMPLE IRAs
- Payroll and HR professionals
- CPAs and benefits administrators
- Employees planning to contribute more in 2024
Employers must carefully review plan documents, update payroll systems, and notify employees of new limits and match options.
FAQ: SIMPLE IRA 2024 Rule Changes
What are the new SIMPLE IRA contribution limits for 2024?
For businesses with 25 or fewer employees, the elective deferral limit increases to $17,600. The catch-up limit for those aged 50 or older increases to $3,850.
Do all businesses get the higher SIMPLE IRA limits in 2024?
No. Only businesses with 25 or fewer employees receive the higher limits automatically. Companies with 26–100 employees must increase their employer match to qualify.
Can employers contribute more than the standard 3% in 2024?
Yes. Employers may optionally contribute up to 10% of pay (capped at $5,000 per employee), in addition to the required match or non-elective contribution.
Do these changes apply to SEP IRAs?
No. The 2024 updates from the SECURE 2.0 Act apply only to SIMPLE IRA plans, not SEP IRAs.
What forms are used to set up a SIMPLE IRA?
Employers can use IRS Form 5305-SIMPLE or Form 5304-SIMPLE, depending on how employee IRAs are set up.
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Source: Ian Berger, JD
IRA Analyst
Ed Slott and Company, LLC
Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.