Things to Consider as SIMPLE IRA Deadline Looms
By Mike Rahn, CISP
Not every employer-sponsored retirement plan begins with a full 12-month cycle. The decision-making process that leads to establishing a plan does not always fit neatly into that timetable. This is true whether a retirement plan will operate on a calendar-year basis, or on a fiscal year. Such retirement plans are said to begin with a “short plan year.” This is not necessarily a bad thing. As employers may see it, it’s better to provide some retirement benefit in the first year than no benefit at all.
Deadline to Establish a SIMPLE IRA plan
There are rules that narrow the window within which certain retirement plans can be established. For example, a savings incentive match plan for employees of small employers (SIMPLE) IRA plan must be established by October 1 of any calendar year. Unlike profit sharing and 401(k) plans, all SIMPLE IRA plans operate on a calendar year basis. The only exception to the October 1 rule is for a business that comes into existence after that date. In such cases, a plan could be established “as soon as administratively feasible.”
The logic behind this deadline may be that a three-month plan year will provide rank-and-file employees a meaningful opportunity to make contributions for that year, and to maximize an employer matching contribution to which they may be entitled. Though perhaps unfortunate, the general October 1 deadline applies to all employers, even to an owner-only business that has no rank-and-file employees.
There are many “moving parts” to a SIMPLE IRA plan, so employers must make several important decisions when establishing one. These decisions include eligibility restrictions, the type, amount, and timing of employer contributions, custodianship of individual employees’ SIMPLE IRAs, options for employees to change salary deferral elections, and more. Each of these factors should be carefully considered when establishing a new SIMPLE IRA plan.
What is Meant by “Established?”
IRS guidance on SIMPLE IRA plans does little more than identify the October 1 deadline. But, in keeping with the purpose of this deadline, a best-practice for a business with employees would be for the plan to be fully functioning by that date. This is more clearly articulated for 401(k) safe harbor plans, which also have an October 1 startup deadline, and the principle is the same. In practice, employees should have an opportunity to make salary deferral elections in time to have them apply to compensation earned during the entire October-through-December period.
Who Will be Eligible?
An employer that establishes a SIMPLE IRA plan can offer unrestricted eligibility, allowing even the newest employee to participate immediately. Conversely, eligibility can be restricted, but only to a limited degree. An employer can require as many as two prior years of service, years in which the employee earned at least $5,000, and require that the employee be expected to earn at least $5,000 in the coming year. Either the number of years, or the income requirement—or both—may be reduced or eliminated.
How Will an Employer Contribute?
Employees have but one contribution option, that being to have amounts withheld from their pay—salary deferrals—as pay is received. But several kinds of employer contributions can be made to SIMPLE IRA plans, as the following breakdown describes.
Basic Employer Contributions
Similar to a safe harbor 401(k) plan, a SIMPLE IRA plan requires an employer contribution commitment. Each year, an employer must decide how to make the required SIMPLE IRA contribution: either by contributing two percent of each eligible employee’s annual compensation as a nonelective contribution, known as a NEC, or by making a dollar-for-dollar matching contribution up to three percent of each eligible employee’s compensation. If the matching contribution option is chosen, the employer may reduce the match rate to as low as one percent of compensation in two out of every five years. An employer may actually begin with the reduced-match formula.
SECURE 2.0 Enhanced Contribution
SECURE 2.0 legislation provided an enhanced annual salary deferral limit, which may also result in a larger employer contribution for some plans. The enhanced salary deferral limit applies automatically for plans of employers with no more than 25 employees who earned $5,000 or more in the prior year. Larger employers, those with 26 to 100 such employees, can elect this enhanced salary deferral limit, but doing so requires them to increase their basic employer contributions. Specifically, they must make either a three percent NEC to all eligible employees, instead of two percent, or a matching contribution of four percent, instead of three percent. (Notably, this higher employer contribution is equivalent to employer contributions required in a safe harbor 401(k) plan.)
Optional Employer Contributions
In addition to an employer’s requirement to make basic NEC or matching contributions, employers may elect—also thanks to SECURE 2.0—to make an optional NEC contribution to all eligible employees. For 2026, this contribution must be a uniform percentage of employees’ compensation, not to exceed the lesser of 10 percent of compensation or $5,300.
SIMPLE Roth: Yes or No?
SECURE 2.0 also added a Roth option for both employee salary deferrals and employer contributions to SIMPLE IRA plans. Limited IRS guidance, coupled with necessary adjustments to service provider platforms to accommodate this change, have thus far contributed to slow and gradual implementation. But, just as Roth deferrals in 401(k), 403(b), and governmental 457(b) plans were slow to “take off”—but are now common—it is possible that SIMPLE IRA plans will follow a similar trajectory.
Timing of Employer Contributions
All employer contributions can be made as late as the tax filing deadline for the year. Some contributions, however, are commonly made at intervals during the year. This is the case with employer matching contributions, which are based on employee salary deferrals withheld each pay period. The advantage in making employer contributions after the close of the year is that full-year employee compensation is known at that time. Contributions based on full-year compensation, like matching contributions, can be most easily calculated at that time.
Where Will Contributions Go?
When a SMPLE IRA plan is established, an employer must decide whether all employee salary deferrals and employer contributions will initially go to one custodial organization. Or instead, whether each employee will be permitted to choose the custodian for his or her SIMPLE IRA. By far, the first arrangement—called a designated financial institution, or DFI arrangement—is the more common. Not only is it simpler for a typical business owner and its payroll provider, but those who market retirement plans understandably prefer that all contributions come to the same destination.
When May Employees Change Deferral Elections?
Employees may be limited to one salary deferral election per year, made during the 60-day period before the start of a new calendar year, or when first becoming eligible. In addition, an employer may specify intervals—such as quarterly, monthly, etc.—when an employee may change their election or restore an election after ceasing deferrals. Employees have the right to cease salary deferrals at any time. But, if an employee ceases deferring at an interval other than those specified by the employer, they may be denied the ability to resume deferrals during that year.
The Exclusive Plan Rule
It should be noted that SIMPLE IRA plans have an “exclusive plan” rule, and one cannot be maintained in any year in which an employer maintains another retirement plan that provides a benefit. In other words, it is not possible to transition from a different plan to a SIMPLE IRA plan mid-year.
Time to Think About 2027, Too
A SIMPLE IRA plan’s ongoing administrative requirements include providing eligible employees each year with a “summary description” of the plan’s benefits, terms and conditions, information about the custodial organization and the employer, etc. Both the employer operating the SIMPLE IRA plan and the financial organization holding the SIMPLE IRA assets play a role in providing a summary description to employees.
This process always begins 60 days before the start of the next year; on or about November 1. Thus, for a new 2026 plan established on or before October 1, there could be only a short interval before it’s time to provide the summary description again, this time for 2027.
