What Is a 408(p) SIMPLE Plan? Contributions, Limits, and Withdrawals

A 408(p) SIMPLE plan is a retirement plan under Internal Revenue Code Section 408(p) that lets small businesses fund individual retirement accounts for their employees instead of running a trust-based plan like a 401(k). Employers with 100 or fewer employees can offer one, employees defer part of their pay pre-tax, and the employer is required to chip in every year. For 2026, employees under 50 can defer up to $17,000, and every dollar of both employee and employer money is immediately and permanently owned by the worker. The trade-off for that simplicity is a set of rules that are stricter than a traditional IRA in a few important places, especially around early withdrawals.

Which Employers Can Offer One

Only employers that had 100 or fewer employees earning at least $5,000 in the preceding calendar year can sponsor a SIMPLE IRA.¹ That headcount includes full-time, part-time, and seasonal workers who crossed the $5,000 mark. Self-employed individuals, tax-exempt organizations, and government entities all qualify as long as they meet the size test.

Grow past 100 employees and you get a two-year grace period: you can keep the plan for two calendar years after the last year you satisfied the limit.² After that, you need to transition to a different plan. If you own related businesses, employees across a controlled group or affiliated service group count together toward the 100-employee threshold, so any ownership in another company is worth reviewing with a tax advisor before you set the plan up.

The Exclusive Plan Rule

You cannot run a SIMPLE IRA alongside another employer-sponsored retirement plan for the same employees. No simultaneous 401(k), SEP IRA, profit-sharing plan, or defined benefit plan.³ If you already have another qualified plan, terminate it before the calendar year your SIMPLE contributions begin. Two narrow exceptions exist: a plan that covers only collectively bargained employees who are excluded from the SIMPLE, and separate plans for distinct employee groups during certain acquisitions or dispositions in the current or two preceding calendar years.

Which Employees You Have to Cover

Once the plan is in place, any employee who meets both of these conditions must be allowed to participate:

Received at least $5,000 in compensation from you during any two preceding calendar years (they don’t have to be consecutive).
Reasonably expected to earn at least $5,000 during the current calendar year.

You cannot tighten these conditions. You can loosen them. Some employers drop the prior-year requirement entirely and let all current employees participate immediately.¹

Employee Contribution Limits for 2026

Employees contribute through pre-tax salary deferrals, which reduce their taxable wages. The 2026 limits depend on age and on whether the employer has elected the enhanced “applicable SIMPLE” option.

Standard Limits

Under age 50: up to $17,000 in salary deferrals.⁴
Age 50 or older: an additional $4,000 catch-up, for a total of $21,000.
Ages 60 through 63: a higher catch-up of $5,250 instead of $4,000, for a total of $22,250. This “super catch-up” was created by SECURE 2.0 and applies only during the four years between turning 60 and turning 64.

Higher Limits Under the Applicable SIMPLE Option

SECURE 2.0 created an optional “applicable SIMPLE” designation that raises the base deferral limit to $18,100 for 2026. Employers with 25 or fewer employees who received at least $5,000 in prior-year compensation can elect it without changing their own contribution rates.⁵ Employers with 26 to 100 employees can also elect the higher deferral limits, but doing so triggers higher employer contributions.⁶

What the Employer Has to Contribute

Every SIMPLE IRA requires the employer to fund it each year through one of two formulas. You pick a formula and commit to it for the full calendar year, and every dollar you contribute vests immediately.⁷

Dollar-for-Dollar Match Up to 3%

You match each employee’s salary deferral dollar-for-dollar, up to 3% of their compensation. An employee earning $60,000 who defers $3,000 gets a $1,800 match. An employee who defers nothing gets nothing. You can temporarily drop the match as low as 1%, but not for more than two out of any five-year period ending with the year of the reduction.

2% Non-Elective Contribution

Instead of matching, you can contribute 2% of compensation for every eligible employee, whether or not they defer anything. Compensation is capped at $360,000 for 2026, so the maximum non-elective contribution per employee is $7,200.⁴ Employers who want predictable, uniform costs often prefer this route because it doesn’t fluctuate with individual deferral behavior.

Higher Rates Under the Enhanced Option

Employers with more than 25 employees who elect the applicable SIMPLE designation to unlock higher deferral limits must also raise their own contributions. The non-elective rate goes from 2% to 3%, and the match goes from 3% to 4% of compensation.⁶ Employers with 25 or fewer employees who elect the higher deferral limits keep the standard employer rates.

Deposit Deadlines

Employer matching and non-elective contributions must be deposited by the due date for your business income tax return, including extensions.¹ Employee salary deferrals are different. They have to reach the financial institution as soon as they can reasonably be separated from your general business assets. The Department of Labor gives plans with fewer than 100 participants a seven-business-day safe harbor, but the underlying standard is “as soon as reasonably possible,” which for most payroll cycles means within a few days.⁸ Late deferral deposits are one of the most common SIMPLE IRA compliance failures, so building the transfer into payroll from day one saves you from prohibited-transaction problems later.

Setting Up the Plan

You adopt a SIMPLE IRA by completing one of two IRS model forms. Neither is filed with the IRS. You keep the signed original as your plan document.⁹

Form 5304-SIMPLE lets each employee pick their own financial institution.
Form 5305-SIMPLE designates a single financial institution for all employee accounts.

The deadline to establish a SIMPLE IRA for a given tax year is October 1. A brand-new business that comes into existence after October 1 can set one up as soon as administratively feasible. If you previously maintained a SIMPLE IRA, a replacement plan can only start on January 1.¹⁰

The Annual Notice and Election Period

Before each plan year, you must give every eligible employee a written notice covering their right to start, change, or stop salary deferrals and your chosen employer contribution formula for the coming year.¹¹ The election period runs for at least 60 days immediately before January 1, generally November 2 through December 31.⁷ The notice needs to reach employees before that window opens, so late October is the practical deadline.

Beyond the annual notice, administration is light. There’s no Form 5500 filing, and no nondiscrimination testing. The mandatory employer contribution and immediate vesting essentially build fairness into the plan design, so the IRS doesn’t impose the top-heavy or ADP/ACP testing that 401(k) sponsors deal with.

Withdrawals and the Two-Year Penalty Rule

Money pulled out of a SIMPLE IRA is taxed as ordinary income, just like a traditional IRA withdrawal.¹² Withdraw before age 59½ and you also owe a 10% early withdrawal tax.

This is where SIMPLE IRAs get stricter than other retirement accounts. Take money out within the first two years of participation and that 10% penalty jumps to 25%. The two-year clock starts on the first day your employer deposits contributions into your SIMPLE IRA.¹ That 25% hit catches people off guard.

Exceptions to the Early Withdrawal Penalty

Several situations let you avoid the penalty entirely, though the withdrawal is still taxed as ordinary income:

Age 59½ or older.
Death of the account holder or total and permanent disability.
First-time home purchase, up to $10,000.
Terminal illness certified by a physician.¹³

SECURE 2.0 added more. Emergency personal expense distributions allow a penalty-free withdrawal of up to $1,000 per calendar year, so long as the withdrawal doesn’t drop your balance below $1,000, and the plan administrator can rely on your written self-certification.¹⁴ Domestic abuse victims can withdraw the lesser of $10,000 or 50% of their account balance without penalty.

Rollovers and Transfers

The two-year window restricts where you can move the money, not just whether you can spend it. During those first two years, a rollover or transfer from your SIMPLE IRA can only go into another SIMPLE IRA. Move the funds to a traditional IRA, 401(k), or any other type of plan during that window and the IRS treats it as a taxable distribution and applies the 25% penalty.¹²

After the two-year period, you can roll funds tax-free into a traditional IRA, a SEP IRA, or an employer-sponsored plan such as a 401(k). This is often when employees consolidate old SIMPLE balances into an account with broader investment options.

Required Minimum Distributions

SIMPLE IRAs follow the same required minimum distribution rules as traditional IRAs. You must begin taking annual withdrawals by April 1 of the year after you turn 73.¹⁵ Missing or underpaying an RMD triggers a 25% excise tax on the shortfall, dropping to 10% if you correct the shortfall within two years.

Tax Credits for Starting One

Small employers starting a SIMPLE IRA for the first time can claim a federal tax credit against setup and administrative costs for the first three plan years. Employers with 50 or fewer employees who earned at least $5,000 in the prior year get a credit of 100% of eligible startup costs, up to the greater of $500 or $250 per eligible non-highly-compensated employee, capped at $5,000.¹⁶ Employers with 51 to 100 qualifying employees get 50% of those costs.

A separate credit covers the employer contributions themselves. For employers with 50 or fewer employees, the credit equals 100% of the employer contribution for each participant, up to $1,000 per person, for the first two plan years. It phases down after that: 75% in year three, 50% in year four, and 25% in year five. Employers with 51 to 100 employees receive a reduced version. Neither credit applies to contributions made for employees who earned more than $100,000 in the relevant year.

Switching to a 401(k) Mid-Year

Before SECURE 2.0, the exclusive plan rule effectively locked employers into their SIMPLE IRA for the full calendar year. Starting in 2024, an employer can terminate a SIMPLE IRA mid-year and replace it with a safe harbor 401(k). The replacement plan has to be a safe harbor design for this exception to apply.¹⁷

In the transition year, each employee’s total deferrals across both plans are capped at a time-weighted average of the two plans’ annual limits, so employees can’t stack full limits from both. If you’re considering the switch, notify employees at least 30 days before the SIMPLE IRA termination date and coordinate with your payroll provider and financial institution to stop SIMPLE deferrals on time.

1
Internal Revenue Service. Retirement Plans FAQs Regarding SIMPLE IRA Plans
2
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3
Internal Revenue Service. SIMPLE IRA Plan Fix-It Guide – Your Business Sponsors Another Qualified Plan
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Internal Revenue Service. SIMPLE IRA Contribution Limits
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Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
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Office of the Law Revision Counsel. 26 USC 408 Individual Retirement Accounts
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Internal Revenue Service. SIMPLE IRA Plan
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Internal Revenue Service. SIMPLE IRA Plan Fix-It Guide – You Didn’t Deposit Employee Elective Deferrals Timely
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Internal Revenue Service. SIMPLE IRA Plan Fix-It Guide – SIMPLE IRA Plan Overview
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Internal Revenue Service. Publication 560 (2025), Retirement Plans for Small Business
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Internal Revenue Service. SIMPLE IRA Plan Fix-It Guide – Annual SIMPLE IRA Plan Notification Requirements Weren’t Followed
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Internal Revenue Service. SIMPLE IRA Withdrawal and Transfer Rules
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Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
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Internal Revenue Service. Notice 2024-55 – Certain Exceptions to the 10 Percent Additional Tax Under Code Section 72(t)
15
Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs)
16
Internal Revenue Service. Retirement Plans Startup Costs Tax Credit
17
Internal Revenue Service. Notice 2024-02 – Miscellaneous Changes Under the SECURE 2.0 Act of 2022