SIMPLE IRA for Small Business: 2027 Limits and Setup

A SIMPLE IRA is the easiest retirement plan for a small business with employees: no annual Form 5500 filing, low setup cost, and employees save through payroll while the employer adds a 3% match or a 2% contribution. For 2026 employees can defer up to $17,000, and the 2027 limit is due from the IRS in November. If you want a plan in place for your team next year, now is the time to decide.

This guide covers eligibility, limits, the two employer contribution formulas, setup step by step, and a payroll example with real numbers. It is general information, not tax or legal advice; a plan provider or tax professional can confirm the details for your business.

What is a SIMPLE IRA?

SIMPLE stands for Savings Incentive Match Plan for Employees. The employer adopts the plan, each eligible employee opens a SIMPLE IRA at a financial institution, and contributions go straight into those accounts. The IRS summarizes the rules on its SIMPLE IRA plan page. The plan suits businesses that have outgrown owner-only options but do not want the testing and administration of a full 401(k).

SIMPLE IRA limits: 2026 and 2027

Limit	2026	2027
Employee deferral	$17,000	Pending IRS announcement
Higher deferral (qualifying plans under SECURE 2.0)	$18,100	Pending
Catch-up, age 50+	$4,000 ($3,850 for certain higher-limit plans)	Pending
Catch-up, ages 60-63	$5,250	Pending
Compensation limit for 2% nonelective contribution	$360,000	Pending

The 2026 figures come from the IRS release on 2026 limits. Unlike 401(k) plans, the mandatory Roth rule for high earners' catch-up contributions does not apply to SIMPLE IRAs. The deferral limit is shared with any 401(k) the employee contributes to at another job.

Who can use a SIMPLE IRA?

• Employer size: 100 or fewer employees who received at least $5,000 in compensation in the prior year.
• No other plan: you cannot maintain another retirement plan in the same year (the exclusive plan rule).
• Employee eligibility: anyone who earned at least $5,000 in any two prior years and is expected to earn $5,000 this year. You can use looser rules, but not stricter ones.
• Excludable groups: union employees whose retirement benefits were bargained for, and nonresident aliens with no US wages.

Self-employed owners participate too. A sole proprietor's compensation is net earnings from self-employment.

Employer contributions: 3% match vs 2% nonelective

Feature	3% match	2% nonelective
Who receives it	Only employees who defer	Every eligible employee
Amount	Dollar for dollar up to 3% of pay	2% of pay, up to the compensation limit
Flexibility	Can drop to 1% in 2 of any 5 years	Fixed
Cost predictability	Depends on participation	Predictable
Best for	Teams with mixed participation	Teams where few defer but you want to reward everyone

Under SECURE 2.0, employers can also add an extra uniform nonelective contribution up to the lesser of 10% of pay or $5,000 per employee. Employers with 26 to 100 employees that want the higher $18,100 deferral limit must offer a 4% match or 3% nonelective contribution.

Worked example: a five-person design studio

Illustrative: a studio owner (sole proprietor, $110,000 net earnings after the SE tax adjustment) has four employees and chooses the 3% match for 2026.

Person	Pay	Deferral	Employer match
Owner	$110,000	$17,000	$3,300
Designer A	$58,000	$2,900 (5%)	$1,740
Designer B	$52,000	$1,040 (2%)	$1,040
Coordinator	$41,000	$0	$0
Part-time assistant	$18,000	$540 (3%)	$540
Total			$6,620

The employee match costs $3,320, and the owner's own $3,300 match is deductible on the owner's return. Had the owner chosen the 2% nonelective contribution, every employee would get 2% regardless of deferral: $1,160 + $1,040 + $820 + $360 = $3,380 for staff, plus $2,200 for the owner. The coordinator would receive $820 instead of nothing.

The owner saves $20,300 in total. With a solo 401(k) the owner could save more, but a solo plan is not allowed once you have eligible employees, and a SEP IRA would require the same percentage for everyone, so a 20% SEP contribution would cost far more for staff.

How to set up a SIMPLE IRA step by step

1. Choose a provider (bank, brokerage or payroll provider). Many payroll services connect directly.
2. Adopt the plan document. Use IRS Form 5304-SIMPLE if employees choose their own institution, or Form 5305-SIMPLE if you designate one. Keep it in your records; it is not filed with the IRS.
3. Pick the contribution formula for the year: 3% match or 2% nonelective.
4. Give employees notice before the election period, including the summary description and the formula.
5. Run the election period. For a January 1 start, it is the 60 days before January 1 (November 2 to December 31).
6. Open accounts for each participant.
7. Withhold deferrals in payroll and deposit them within 30 days after the end of the month in which they were withheld. Do it faster where possible.
8. Deposit employer contributions by your tax return due date, including extensions.

A plan can begin on any date from January 1 through October 1 in its first year, so if you miss January, you can still start mid-2027.

Tax credits for starting a plan

Small employers may qualify for a credit for retirement plan startup costs, and in some cases for employer contributions, claimed on Form 8881. The amounts depend on your employee count; confirm with your tax preparer before you budget for the plan.

How the plan fits into payroll

Employee deferrals reduce income tax withholding but are still subject to Social Security and Medicare, so they show in Box 12 of Form W-2 with code S. Employer contributions are not wages and are not subject to FICA. Factor the match into your overall cost of an employee alongside employer payroll taxes and benefits; if you are still building out payroll, start with how to do payroll yourself.

Common mistakes

• Late deposits of deferrals. Employee money must go in promptly; late deposits are a prohibited transaction risk.
• Excluding eligible part-timers who meet the $5,000 test.
• Adding a 401(k) mid-year without following the transition rules.
• Missing the termination notice. To end a SIMPLE IRA for next year, notify employees before November 2.
• Underbudgeting the match. Model the cost in your small business budget using realistic participation rates.

SIMPLE IRA vs SEP IRA vs 401(k) for employers

Feature	SIMPLE IRA	SEP IRA	Traditional or safe harbor 401(k)
Employee deferrals	Yes	No	Yes
Employer cost	3% match or 2% of pay	Same percentage for all eligible staff, up to 25%	Depends on design; safe harbor match or 3% contribution
Annual nondiscrimination testing	No	No	Yes, unless safe harbor
Form 5500 filing	No	No	Yes
Typical setup and admin cost	Low	Low	Moderate to high
Vesting	Immediate	Immediate	Can use a vesting schedule
Max owner savings	Moderate	High, but costly with staff	Highest
Loans	No	No	Optional

The trade-off is simple: a SIMPLE IRA caps what the owner can save but keeps cost and paperwork low. Once owner savings become the priority and the team is stable, many businesses move to a safe harbor 401(k).

Annual SIMPLE IRA calendar

When	Task
Before November 2	Send the annual notice: contribution formula for next year, election rights, summary description
November 2 to December 31	Election period; collect new or changed deferral elections
January 1	New deferral elections and limits take effect in payroll
Every payroll	Withhold deferrals; deposit within 30 days after month-end
By January 31	Report deferrals on Form W-2, Box 12, code S
By the tax filing deadline (with extensions)	Deposit employer match or nonelective contributions for the prior year

Because it is early November as this is written, an employer that wants to keep its current formula for 2027 should already have sent its notice. If you missed the date, send it as soon as possible and give employees a full 60-day window from the notice to make elections.

How owners participate

A sole proprietor or partner treats net earnings from self-employment, after subtracting half of self-employment tax, as compensation. Deferrals and the employer match for the owner are deducted on the owner's personal return rather than as a business expense on Schedule C. An S corporation owner participates through W-2 salary like any other employee, so the match is based on salary, not distributions. If you pay yourself a small salary, your SIMPLE IRA contributions will be small too.

Switching from a SIMPLE IRA to a 401(k)

1. Decide the effective date. Traditionally a switch happens on January 1; SECURE 2.0 allows a mid-year replacement with a safe harbor 401(k) under transition rules.
2. Notify employees before November 2 that the SIMPLE IRA will end on January 1 if you are switching at year-end.
3. Tell the financial institution and payroll provider so deferrals stop on the right date.
4. Remind employees about the two-year rule. Money in a SIMPLE IRA for less than two years generally can only move to another SIMPLE IRA; moving it elsewhere risks the 25% additional tax, so confirm any transfer with the plan provider.

Compare with other plans

If you have no employees, the 2027 401(k) and IRA limits for the self-employed usually allow far higher contributions. If you are about to hire, our guide to hiring your first employee covers the other setup steps.

Pay for benefits with steady cash flow

Retirement contributions are easier to sustain when client payments arrive on time. Use clear payment terms and send invoices as soon as work is delivered. Our free invoice generator lets you create professional invoices with no sign-up and download them as PDF.