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

A 408(p) SIMPLE plan is a retirement arrangement under Internal Revenue Code Section 408(p) that lets small employers offer tax-favored savings through individual retirement accounts instead of a trust-based plan like a 401(k). Employees contribute through pre-tax salary deferrals, the employer is required to chip in each year through either a match or a flat contribution, and every dollar is fully owned by the employee from day one. For 2026, employees can defer up to $17,000 of pay, and the whole plan runs with far less paperwork than a 401(k): no Form 5500, no nondiscrimination testing, and a plan document that fits on a single IRS form.¹

Which Employers Can Sponsor One

Only employers that had 100 or fewer employees earning at least $5,000 in the preceding calendar year can sponsor a 408(p) SIMPLE plan.² The headcount includes full-time, part-time, and seasonal workers who crossed the $5,000 compensation line. Self-employed individuals, tax-exempt organizations, and government entities all qualify as long as they meet the size requirement.

If your business grows past 100, you get a two-year grace period: you can keep the SIMPLE in place for two calendar years after the last year you satisfied the limit.³ After that, you need to transition to a different plan. If you own 80% or more of other businesses, employees across those related entities count toward the 100-employee threshold, so a tax advisor should review the picture before you adopt a plan.

The Exclusive Plan Rule

You cannot maintain a 408(p) SIMPLE alongside another employer-sponsored retirement plan for the same employees. No simultaneous 401(k), SEP IRA, profit-sharing plan, or defined benefit plan.⁴ If you already have another qualified plan, you have to terminate it before the calendar year your SIMPLE contributions begin. Two narrow exceptions exist: a separate plan that only covers collectively bargained employees excluded from the SIMPLE, and a plan carried over through a business acquisition or disposition in the current or two preceding calendar years.

Which Employees Must Be Covered

Once the plan is in place, you must let any employee participate who received at least $5,000 in compensation from you during any two preceding calendar years (they don’t have to be consecutive) and who is reasonably expected to earn at least $5,000 in the current year.² You cannot tighten these conditions. You can loosen them: some employers drop the prior-year requirement entirely and open the plan to all current employees.

Setting Up the Plan

You adopt a 408(p) SIMPLE by completing one of two IRS model forms. Neither gets filed with the IRS; you keep the signed original as your plan document.⁵ Use Form 5304-SIMPLE if each employee will pick their own financial institution to hold their SIMPLE IRA. Use Form 5305-SIMPLE if you want to designate a single financial institution for all employee accounts.

The deadline to establish a SIMPLE 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, any new plan can only start on January 1.⁶

The Annual Employee Notice

Before contributions begin each year, you must give every eligible employee written notice of their right to make or change salary deferrals and tell them which employer contribution formula you’ve chosen for the year.⁷ The election period runs for at least 60 days immediately before January 1 of the plan year, generally November 2 through December 31.¹ Your notice must go out before that window opens, so late October is the practical deadline.

2026 Employee Contribution Limits

Employees fund the plan through pre-tax salary deferrals, which reduce their taxable wages. The 2026 limits depend on the employee’s age and on whether the employer has elected the enhanced “applicable SIMPLE” option created by SECURE 2.0.

Under age 50: up to $17,000 in salary deferrals.⁸
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” applies only during the four years between turning 60 and turning 64.

Higher Limits Under the Applicable SIMPLE Option

Employers with 25 or fewer employees who earned at least $5,000 the prior year can elect the applicable SIMPLE designation, which raises the base deferral limit to $18,100 for 2026 at no extra employer cost.⁹ Employers with 26 to 100 employees can also elect the higher limits, but doing so triggers larger employer contributions.¹⁰

What the Employer Has to Contribute

Every 408(p) SIMPLE requires the employer to fund the plan each year using one of two formulas. You pick the formula and commit to it for the full calendar year, and all employer contributions vest immediately.¹

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 who earns $60,000 and defers $3,000 gets a $1,800 match. An employee who defers nothing gets nothing. You can temporarily lower the match to as little as 1%, but not for more than two out of any five-year period ending with the year the reduction takes effect.

2% Non-Elective for Everyone Eligible

Instead of matching, you can contribute 2% of compensation for every eligible employee, whether or not they defer any of their own pay. Compensation is capped at $360,000 for 2026, so the maximum non-elective contribution per employee is $7,200.⁸ Employers who want a predictable cost often prefer this route since it doesn’t swing with individual deferral decisions.

Higher Rates for the Applicable SIMPLE Option

Employers with more than 25 employees who elect the applicable SIMPLE designation to unlock the higher deferral limits must also increase their own contributions: the non-elective rises from 2% to 3%, and the match rises from 3% to 4%.¹⁰ Employers with 25 or fewer are not required to bump their contribution percentage.

Deposit Deadlines

Employer matching and non-elective contributions must be deposited by the due date for filing your business income tax return, including extensions.² Employee salary deferrals have a tighter clock. They must be forwarded to the financial institution as soon as they can reasonably be separated from your general business assets. The Department of Labor safe harbor for plans with fewer than 100 participants is seven business days, though the real standard is “as soon as reasonably possible.”¹¹ Late deposits are one of the most common compliance failures and can be treated as a prohibited transaction, so build the timing into your payroll process from the start.

Taking Money Out

Withdrawals from a 408(p) SIMPLE are taxed as ordinary income, just like withdrawals from a traditional IRA.¹² If you withdraw before age 59½, you owe a 10% early withdrawal tax on top of the income tax.

This is where SIMPLE plans are stricter than other retirement accounts. If you take money out within the first two years of participation, the 10% penalty jumps to 25%. The two-year clock starts on the first day your employer deposited contributions into your SIMPLE IRA. That 25% hit catches people off guard, and it makes early withdrawals during the opening period very expensive.

Exceptions to the Early Withdrawal Penalty

Several situations avoid the 10% or 25% penalty, though income tax still applies:

Reaching age 59½.
Death of the account holder, or total and permanent disability.
Up to $10,000 for a first-time home purchase.
A physician’s certification of terminal illness.¹³
Emergency personal expense distributions up to $1,000 per calendar year, provided the withdrawal doesn’t push your balance below $1,000. You can self-certify eligibility in writing.¹⁴
Domestic abuse victim distributions, up to the lesser of $10,000 or 50% of the account balance.

Rollovers and the Two-Year Lock

The two-year participation period also restricts where the money can go. During the first two years, a rollover or transfer from a 408(p) SIMPLE can only land in another SIMPLE IRA. Moving funds into a traditional IRA, a 401(k), or any other plan during that window is treated as a taxable distribution and triggers the 25% penalty. After the two-year mark, you can roll the funds tax-free into a traditional IRA, a SEP IRA, or an employer plan like a 401(k).

Required Minimum Distributions

Like traditional IRAs, 408(p) SIMPLE accounts are subject to required minimum distributions. You must begin annual withdrawals by April 1 of the year after you turn 73.¹⁵ Missing an RMD triggers a 25% excise tax on the shortfall, dropping to 10% if corrected within two years.

Tax Credits for Starting a Plan

Small employers starting a 408(p) SIMPLE for the first time can claim a federal tax credit against setup and administrative costs for the plan’s first three years. Employers with 50 or fewer employees who earned at least $5,000 in the prior year receive a credit of 100% of eligible startup costs, up to the greater of $500 or $250 per eligible non-highly-compensated employee, with a $5,000 ceiling.¹⁶ Employers with 51 to 100 qualifying employees get 50% of those same 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 locked employers into their SIMPLE for the full calendar year. Starting in 2024, you can terminate a 408(p) SIMPLE mid-year and replace it with a safe harbor 401(k). The replacement must be a safe harbor design for this exception to work.¹⁷ In the transition year, each employee’s total deferrals across both plans are capped using a time-weighted blend of the two annual limits, so employees can’t stack both full limits in one year. Notify employees at least 30 days before the SIMPLE termination date and coordinate with your payroll provider to stop SIMPLE deferrals on time.

1
Internal Revenue Service. SIMPLE IRA Plan
2
Internal Revenue Service. Retirement Plans FAQs Regarding SIMPLE IRA Plans
3
Internal Revenue Service. SIMPLE IRA Plan Fix-It Guide – You Have More Than 100 Employees
4
Internal Revenue Service. SIMPLE IRA Plan Fix-It Guide – Your Business Sponsors Another Qualified Plan
5
Internal Revenue Service. SIMPLE IRA Plan Fix-It Guide – SIMPLE IRA Plan Overview
6
Internal Revenue Service. Publication 560, Retirement Plans for Small Business
7
Internal Revenue Service. SIMPLE IRA Plan Fix-It Guide – Annual Notification Requirements
8
Internal Revenue Service. SIMPLE IRA Contribution Limits
9
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026
10
Office of the Law Revision Counsel. 26 USC 408
11
Internal Revenue Service. SIMPLE IRA Plan Fix-It Guide – Late Deposits
12
Internal Revenue Service. SIMPLE IRA Withdrawal and Transfer Rules
13
Internal Revenue Service. Exceptions to Tax on Early Distributions
14
Internal Revenue Service. Notice 2024-55
15
Internal Revenue Service. Required Minimum Distributions (RMDs)
16
Internal Revenue Service. Retirement Plans Startup Costs Tax Credit
17
Internal Revenue Service. Notice 2024-02