Can an Employer Contribute to an IRA? SEP, SIMPLE, and Payroll IRAs

Yes, an employer can contribute to an IRA on behalf of employees, and federal law gives businesses three ways to do it. A Simplified Employee Pension (SEP) IRA is funded entirely by the employer. A Savings Incentive Match Plan for Employees (SIMPLE) IRA splits funding between the employer and the worker. A payroll deduction IRA routes wages into an employee-owned IRA without any company money going in. The right choice depends on business size, how much the owner wants to contribute, and whether the plan will be set up in time to count for the current tax year.

SEP IRA: Employer-Funded, Uniform Percentage

A SEP IRA is the simplest employer-funded option. The business puts in every dollar, and employees generally do not contribute on their own. Whatever percentage of pay the owner contributes for themselves, every eligible employee has to get the same percentage.¹ That uniformity is the price of the plan’s simplicity.

For 2026, the maximum contribution per employee is the lesser of 25% of compensation or $72,000.² Only the first $360,000 of compensation counts toward the calculation.³ Contribution amounts don’t have to be consistent year to year. A business can give generously in a strong year and skip contributions entirely in a weak one, which is why SEPs work well for companies with lumpy revenue.

Every SEP contribution vests immediately. Once the money lands in an employee’s account, it belongs to them; the employer can’t claw it back or attach a vesting schedule.¹

SIMPLE IRA: Shared Funding for Smaller Employers

A SIMPLE IRA is limited to businesses with 100 or fewer employees who earned at least $5,000 in the preceding year.¹ Employees fund the plan through salary deferrals, and the employer adds money on top through one of two formulas.

Matching Formula

The default is a dollar-for-dollar match of employee deferrals up to 3% of each worker’s compensation. An employer can drop the match to as low as 1% in two out of any five years, provided employees are told before the annual election window opens.⁴ Under the matching formula, an employee who doesn’t defer anything costs the employer nothing.

Nonelective Formula

The alternative is a flat 2% contribution for every eligible employee, whether or not the worker defers a dime.¹ It costs more, but it guarantees that workers who can’t afford to save still get something, and it removes the need to track individual deferral rates.

The employer picks one formula per year and communicates it to all eligible employees during the annual notice period, which runs at least 60 days before the calendar year begins.⁵

2026 Employee Deferral Limits

Employees can defer up to $17,000 into a SIMPLE IRA in 2026. Workers 50 and older can add a $4,000 catch-up, and a SECURE 2.0 provision lets those aged 60 through 63 contribute an extra $5,250 instead.⁶ The employer’s match or 2% nonelective stacks on top of these deferrals.

Payroll Deduction IRA: No Employer Money

A payroll deduction IRA is administrative only. The employer withholds money from each paycheck and deposits it into a traditional or Roth IRA at a financial institution the employee chose. No company dollars go in, and because the employer isn’t contributing, the plan avoids the reporting and testing rules that come with SEP and SIMPLE plans.

Contributions are capped at the standard IRA limits: $7,500 for 2026, plus a $1,100 catch-up for workers 50 and older.⁶ Those figures are far below what SEP and SIMPLE plans allow, which limits their usefulness for higher earners.

The main employer obligation is depositing withheld funds quickly. Department of Labor rules treat late deposits as a prohibited transaction, and for plans with fewer than 100 participants there’s a 7-business-day safe harbor from the date of withholding.⁷ Automating the transfer is the cleanest way to stay compliant.

As of early 2026, roughly 17 states have enacted mandates requiring employers who offer no retirement plan to enroll workers in a state-run payroll deduction IRA. Deadlines and penalties vary. Businesses that already sponsor a SEP, SIMPLE, or 401(k) are generally exempt.

Which Employees Must Be Covered

Federal law sets the most restrictive eligibility rules an employer can use. A business can always be more generous.

For a SEP, an employer can exclude workers under 21, workers who haven’t performed services in three of the last five years, and workers who earned less than $800 in 2026 (adjusted annually).⁸³ Employees covered by a collective bargaining agreement and nonresident aliens without U.S.-source income from the employer can also be excluded.

For a SIMPLE, the strictest allowable rule requires the employee to have earned at least $5,000 in any two prior calendar years and to be reasonably expected to earn at least $5,000 in the current year.

Setup and Funding Deadlines

Deadlines are where employer-funded IRAs quietly go wrong. The two plan types have very different clocks.

SEP IRA

A SEP can be established as late as the due date of the business’s tax return, including extensions.⁸ A sole proprietor who extends to October 15 has until that date to both create the plan and fund it for the prior year. The plan document is IRS Form 5305-SEP, which the employer keeps on file and distributes to each eligible employee. Contributions themselves are also due by the tax return deadline including extensions.

SIMPLE IRA

SIMPLE IRAs have a much tighter window. A new SIMPLE must be established between January 1 and October 1 of the year it takes effect. The only exception is a business that came into existence after October 1, which can set up a plan as soon as administratively feasible.⁹ Miss October 1 and you’re waiting until January.

The employer uses Form 5304-SIMPLE, which lets each employee pick their own financial institution, or Form 5305-SIMPLE, which routes all contributions to a single institution the employer selects.⁵

Employer matching and nonelective contributions are due by the business’s tax filing deadline including extensions. Employee salary deferrals run on a much shorter clock: the DOL requires deposit as soon as the money can reasonably be separated from general assets, with an outside limit of the 15th business day of the following month. That outside limit is a ceiling, not a safe harbor. Plans with fewer than 100 participants get the 7-business-day safe harbor.⁷ Late deposits can trigger excise taxes and personal liability for the owner.

Tax Benefits That Offset the Cost

Employer contributions to SEP and SIMPLE IRAs are deductible business expenses. Two federal credits can reduce the cost further for small employers starting a new plan.

The startup costs credit covers up to 100% of eligible administrative expenses for three years, capped at $5,000 per year. Businesses with 50 or fewer qualifying employees get the full credit; those with 51 to 100 qualifying employees get 50%.¹⁰

A separate SECURE 2.0 credit targets the contributions themselves. For the first two plan years, an eligible employer can claim 100% of its contributions as a credit, up to $1,000 per employee. The percentage steps down to 75%, 50%, and 25% in years three through five. The credit phases out by 2% for each employee above 50, and contributions for workers earning over $105,000 don’t qualify.¹¹ For a small business in its first years of sponsoring a plan, stacking both credits can make employer contributions nearly free.

SECURE 2.0 also lets employers offer a Roth option in SEP and SIMPLE plans. Employees can designate their deferrals as Roth, and employer matching or nonelective contributions can be treated as Roth too, though those amounts become taxable to the employee in the year contributed.¹²

1
Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts
2
Internal Revenue Service. SEP Contribution Limits
3
Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs
4
Internal Revenue Service. Retirement Topics – SIMPLE IRA Contribution Limits
5
Internal Revenue Service. SIMPLE IRA Plan
6
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
7
Internal Revenue Service. 401(k) Plan Fix-It Guide – You Haven’t Timely Deposited Employee Elective Deferrals
8
Internal Revenue Service. Retirement Plans FAQs Regarding SEPs
9
Internal Revenue Service. Retirement Plans FAQs Regarding SIMPLE IRA Plans
10
Internal Revenue Service. Retirement Plans Startup Costs Tax Credit
11
Internal Revenue Service. Instructions for Form 8881
12
Internal Revenue Service. SECURE 2.0 Act Changes Affect How Businesses Complete Forms W-2