The New SIMPLE Contribution Rules are Not So Simple

As the name implies, a “Savings Incentive Match Plan for Employees” (SIMPLE) is designed to be easy for employers to operate and for employees to manage their accounts. But the latest round of tax law changes is anything but simple. Among other key provisions, the SECURE 2.0 Act authorizes a complex set of new rules for “super” catch-up contributions from eligible older workers.

A SIMPLE Start

Let’s start with the basic rules for SIMPLE-IRAs — the most common and straightforward type of SIMPLE. (There are more complications with the lesser-used SIMPLE-401(k) version.)

SIMPLEs offer a simplified plan structure and reduced reporting requirements for certain small businesses. For starters, an employer can operate a SIMPLE only if it has no more than 100 employees who earned at least $5,000 in the previous year. Any employee who’s been paid at least $5,000 in compensation for any two prior years at the company — and expects to receive at least that much this year — can participate in the plan.

SIMPLEs are available to virtually every type of business, including C Corporations, S corporations, limited liability companies (LLCs) and partnerships. Self-employed individuals can also use this setup.

Regular contributions to a SIMPLE are made on a pretax basis within generous limits, allowing them to grow and compound without any current tax erosion. Typically, the employer will offer a wide range of investment options, including mutual funds targeted to a retirement date.

In addition, an employer operating a SIMPLE must provide either:

• Matching elective contributions of up to 3% of compensation (but not less than 1% in no more than two out of five years), or
• Nonelective contributions of 2% of each eligible employee’s compensation.

The maximum compensation taken into account for these purposes, which is adjusted annually for inflation, is $350,000 in 2025. Employer contributions made to employee accounts are generally deductible.

Contributions to SIMPLEs vest immediately, and employees can withdraw funds from the account anytime. But distributions made before age 59½ are taxable and may be subject to an additional penalty tax unless a special exception applies.

Important: The early withdrawal penalty from a qualified plan or traditional IRA typically equals 10% of the distribution amount. With a SIMPLE-IRA, however, the penalty is 25% for the first two years the employee participates in the plan. After the two-year period expires, the usual 10% penalty applies to early SIMPLE plan withdrawals.

When distributions are finally made, the payouts are taxed at ordinary income rates. Usually, plan participants will be in a lower tax bracket if they wait until retirement to take withdrawals. The required minimum distribution (RMD) rules for qualified plans also apply to SIMPLEs. As with other SIMPLE distributions, RMDs are taxed at ordinary income rates.

Contribution Limits for SIMPLEs

The limit on employee contributions to SIMPLE accounts is adjusted annually for inflation. For 2025, the contribution limit is $16,500 (up from $16,000 in 2024). Similar to 401(k)s, the tax law also allows participating employees age 50 or older to make catch-up contributions to help grow their nest eggs later in life. This is where things start to get tricky.

Notably, SECURE 2.0 established new rules based on company size and created a special category of employees allowed to make “super” catch-up contributions. So, there are now two kinds of catch-up contribution opportunities for older plan participants:

1. Regular catch-up contributions. For 2025, the limit for regular catch-up contributions made by employees ages 50 and older is $3,500. This figure is indexed annually for inflation but is the same for 2024 and 2025.

2. Super catch-up contributions. Beginning in 2025, employees ages 60 through 63 can contribute more to their regular SIMPLE account. The limit in 2025 is equal to the greater of $5,000, 150% of the regular catch-up contribution limit or $5,250. After age 64, the limit reverts to the regular catch-up contribution limit.

Thus, the basic maximum SIMPLE contribution in 2025 is:

• $16,500 for employees under age 50,
• $20,000 for employees ages 50 through 59 ($16,500 plus $3,500),
• $21,750 for employees ages 60 through 63 ($16,500 plus $5,250), and
• $20,000 for employees ages 64 or older ($16,500 plus $3,500).

But wait, there’s more. SECURE 2.0 throws a few extra monkey wrenches into the mix.

The 10% rule. The contribution limit for all eligible employees, regardless of age, is increased by 10% for an eligible employer with 25 or fewer employees. This increase is automatic if the employer had no more than 25 employees earning at least $5,000 in the prior year. What’s more, employers with more than 25 employees can elect to offer the 10% increase if they provide either:

• Matching contributions of up to 4% of compensation (instead of the regular 2%), or
• Nonelective contributions of 3% of each eligible employee’s compensation (instead of the regular 3%).

So, if you benefit from the 10% boost, your employer either has 25 or fewer employees or makes the higher matching contribution for nonelective contributions. When the 10% rule applies, the contribution limit increases to:

• $17,600 for employees under age 50,
• $21,450 for employees ages 50 through 59 ($17,600 plus $3,850),
• $22,850 for employees ages 60 through 63 ($17,600 plus $5,250), and
• $21,450 for employees ages 64 or older ($17,600 plus $3,850).

Note that the indexed limit for super catch-up contributions doesn’t benefit from the 10% increase regardless of the company’s size or if it makes matching or nonelective contributions.

Additional SECURE 2.0 Provisions

If all that wasn’t confusing enough, SECURE 2.0 includes other changes that affect SIMPLE plans. Significantly, employers can now establish Roth-type accounts within a SIMPLE plan, effective as of 2023, though Roth accounts aren’t currently mandatory. Unlike traditional SIMPLEs, contributions to a Roth SIMPLE will be included in the employee’s income in the year of the contribution.

However, RMDs won’t be required from Roth-type SIMPLE accounts. Also, if a SIMPLE permits Roth contributions, catch-up contributions must be made to this type of account for those earning above $145,000.

The rule requiring mandatory Roth-type catch-up contributions for high wage-earners was scheduled to take effect on January 1, 2024. However, the IRS postponed the effective date to January 1, 2026, to give employers more time to comply with the new requirements.

Finally, SECURE 2.0 increased the required beginning date (RBD) for RMDs from qualified plans and SIMPLEs from age 72 to age 73, beginning in 2023. The RBD is scheduled to increase to age 75 in 2033.

Late Start for Employers

Fortunately, it’s not too late if your company doesn’t already have a SIMPLE for the 2025 tax year. It has until October 1, 2025, to establish a plan that can receive 2025 contributions. If you have any questions about this option or the dizzying array of new SIMPLE rules, contact your professional advisors.

Copyright 2025

This article appeared in Walz Group’s April 28, 2025 issue of The Bottom Line e-newsletter, produced by TopLine Content Marketing. This content is for informational purposes only.