Congress Makes SIMPLE IRA Plans Less SIMPLE

By Ian Berger, JD
IRA Analyst
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SIMPLE IRA plans are a popular retirement savings option for small businesses. The plans are available for companies with 100 or fewer employees who received at least $5,000 in pay from the company in the prior year.

SIMPLE IRAs are designed to be administratively easier than 401(k) plans. Businesses can establish a SIMPLE by completing a model IRS form (either Form 5305-SIMPLE or 5304 SIMPLE) and can make contributions directly to employees’ IRAs.

However, the rules governing SIMPLE IRA plans are confusing. How so? In some cases they are treated like IRAs, and in other cases they are treated like workplace plans. Also, SIMPLE IRAs and SEP IRAs differ in certain respects.

One area where SIMPLE IRA plans are about to get less “SIMPLE” is the contribution limits. SIMPLE plans allow for both elective deferrals and employer contributions. The employer contribution can be a matching contribution for employees who make salary deferrals. The match is a dollar-for-dollar match on deferrals, taking into consideration deferrals up to 3% of pay. Or, the employer contribution can be an across-the-board contribution for all eligible employees equal to 2% of pay.

The elective deferral limits have traditionally been a maximum amount for employees under age 50 and an additional “catch-up” amount for those age 50 or older.  For 2023, the under-50 dollar limit was $15,500 and the catch-up limit was $3,500. Both of those limits are adjusted periodically to reflect cost-of-living increases. The IRS has announced that for 2024 the under-50 limit will go up to $16,000, while the catch-up will remain at $3,500.

Easy enough, but Congress just had to complicate things in the SECURE 2.0 Act of 2022. Starting in 2024, both the under-50 limit and the catch-up limit will increase by 10% above the $16,000/$3,500 limits – but only for businesses with 25 or fewer employees. So, for those very small companies, the 2024 under-50 limit is actually $17,600 ($16,000 x 10%), and the catch-up limit is $3,850 ($3,500 x 10%). And it gets worse.  Businesses with 26-100 employees can elect the extra 10%, but only if they provide a 4% (instead of 3%) matching contribution or a 3% (instead of 2%) across-the-board contribution.

Unfortunately, it gets even worse. Also beginning in 2024, SIMPLE IRA employers can make an additional employer across-the-board contribution to all employees who have at least $5,000 of pay for the year. This additional contribution can be up to 10% of pay, but no more than $5,000. It is available even for companies that make their “regular” employer contribution as a match.

These increased limits may be welcome news for SIMPLE IRA participants looking to increase their savings. But SIMPLE? Hardly.