What Employer Contribution Options Does a SIMPLE IRA Offer?
Setting up a SIMPLE IRA for a small business involves one decision that shapes the plan for the entire year: which of two general contribution formulas the employer will use to fund it.
The short answer
An employer offering a SIMPLE IRA generally has to choose between two broad contribution approaches each year: a matching contribution tied to what each employee personally defers, or a non-elective contribution made for every eligible employee regardless of whether that employee contributes anything themselves. Both are structured as required, ongoing employer contributions rather than optional bonuses, and the choice affects both cost and how contributions are distributed across staff.
The matching approach
Under a matching structure, the employer contributes an amount tied to how much each individual employee defers from their own pay, up to a set formula. Employees who choose not to contribute anything themselves typically receive no employer contribution under this approach, since the employer’s piece is calculated as a response to what the employee put in first. This structure is conceptually similar to how an employer match works in a typical workplace 401(k), where the employer’s contribution scales with employee participation.
The non-elective approach
Under a non-elective structure, the employer contributes a set percentage of compensation for every eligible employee, whether or not that employee defers any of their own pay into the plan. This spreads employer contributions more broadly across the workforce, including to employees who might not be actively saving through payroll deductions, but it also means the employer’s total cost doesn’t depend on employee participation the way a matching formula does.
How the two compare in practice
- Matching contributions. Reward active employee participation, can cost the employer less in years when fewer employees choose to defer, and tend to favor employees who are already saving.
- Non-elective contributions. Provide something to every eligible employee regardless of their own savings behavior, which can feel more equitable across a workforce but doesn’t create the same incentive for employees to defer their own pay.
- Annual choice. Employers generally choose, or reconfirm, which formula to use for the upcoming year, with advance notice typically required so employees understand what to expect.
Why the choice matters beyond cost
Beyond the dollar difference, the choice affects behavior. A matching formula tends to encourage employees to contribute something themselves, since skipping a deferral means forfeiting the employer’s contribution too. A non-elective formula removes that incentive but still provides a baseline contribution to every eligible employee’s account, which can matter for a workforce with a mix of savers and non-savers. This decision is one of several structural differences that come up when comparing a SIMPLE IRA against a SEP IRA for a small business, since a SEP IRA doesn’t involve this kind of employee-participation-based choice at all. It also sits alongside other structural features of the plan, including the restriction on moving SIMPLE IRA money elsewhere in the plan’s early years, which applies regardless of which contribution formula the employer selects.
What this decision shapes
Because the specific formulas, percentages, and notice requirements for SIMPLE IRA contributions are set by the government and are subject to change, the details are worth confirming against current guidance before adopting either approach. In general terms, though, the decision comes down to whether an employer wants to reward participation directly through matching, or provide a broader, baseline contribution through a non-elective formula — a choice that shapes the plan’s cost and its effect on employee savings behavior for the year ahead.