Employer eligibility limits for a SIMPLE IRA

A SIMPLE IRA is designed for smaller employers, but eligibility is not based on a casual headcount estimate. The employer-limit test asks how many employees received at least $5,000 in compensation during the prior calendar year, and the one-plan rule separately restricts other employer retirement plans.

The 100-employee test

The employer must generally have no more than 100 employees who received $5,000 or more in compensation during the preceding calendar year. Include each employee who was employed at any time during the year, even if that person had not met the plan's participation conditions. Seasonal and part-time workers can count if they satisfy the compensation threshold. Related-business and controlled-group rules can also affect whose employees are counted, so a company should not assume each affiliate gets its own separate 100-person limit.

The one-plan rule

An employer generally cannot contribute to a SIMPLE IRA for a calendar year if it maintains another retirement plan under which any employee receives an allocation or accrues a benefit for that year. The IRS describes exceptions, including where the other plan covers only collectively bargained employees excluded from the SIMPLE IRA, or where participation is separated in certain acquisition or disposition situations. An employee participating in an unrelated employer's plan does not by itself violate the employer's one-plan requirement.

Growth beyond the limit

A business that has maintained a SIMPLE IRA for at least one year and later exceeds the 100-employee limit may receive a two-calendar-year grace period under the statute and IRS guidance. A different rule applies when the employer exceeds the limit because of an acquisition, disposition, or similar transaction. Confirm the specific facts and plan year before applying the grace rule; it is not a permanent exemption from eligibility.

Do not confuse employer eligibility with employee eligibility

The employer-size test decides whether the business may sponsor the plan. Employee participation uses a separate test: generally, an employee qualifies after receiving at least $5,000 in compensation during any two preceding years and being reasonably expected to receive at least $5,000 in the current year, unless the employer uses less restrictive terms. An employer cannot use the employee test to exclude staff from the employer-size count.

Common CFP exam traps

• Counting only full-time or already eligible employees for the employer-size test.
• Treating exactly 100 qualifying employees as ineligible; the general test permits no more than 100.
• Assuming every worker at an affiliated business can be ignored without checking controlled-group rules.
• Confusing a participant's separate retirement plan with a second plan sponsored by the same employer.
• Treating the growth grace period as unlimited or applicable to every acquisition fact pattern.

Key takeaway

Analyze two gates separately: the employer's qualifying employee count and the one-plan rule. Then check for controlled-group aggregation and any limited grace-period exception.

The general employer test

A SIMPLE IRA is designed for eligible small employers. The general rule permits an employer with 100 or fewer employees who received at least $5,000 in compensation during the preceding calendar year to establish one, provided the employer did not maintain another qualified retirement plan during the relevant period. The employee-count test looks at employees who met the compensation threshold, not simply everyone on payroll. Controlled-group and affiliated-service-group rules can require related businesses to be counted together.

A new employer that did not exist throughout the prior calendar year may use special rules. Employers that exceed the 100-employee threshold may have a limited grace period to continue the plan under statutory conditions, but eligibility and contributions must be checked. Do not infer that a business qualifies just because it has fewer than 100 people today; examine compensation histories, related entities, prior plans, and plan documents.

A SIMPLE IRA is not the only SIMPLE arrangement. A SIMPLE 401(k) shares some broad design features but follows different filing and plan rules. An employer cannot assume it has chosen the IRA version based only on the word “SIMPLE.” Confirm the adopted plan document and account structure before applying eligibility or contribution rules.

Who must be covered

An employee generally must be allowed to participate if they received at least $5,000 in compensation from the employer during any two preceding calendar years, whether or not consecutive, and are reasonably expected to receive at least $5,000 in the current year. The employer may use less restrictive eligibility rules, such as a lower compensation threshold or a shorter service period, if the plan allows. Certain categories can be excluded under the law and plan terms; verify rather than guessing.

The employer selects either a matching contribution formula or a nonelective contribution formula for the year, subject to current law and the plan’s permitted elections. Under a match, workers generally receive the employer contribution only if they defer salary. Under a 2% nonelective formula, eligible workers can receive the employer contribution even when they do not defer. The choice affects the employer’s cost and each employee’s outcome.

The employer must provide notices and election opportunities by applicable deadlines. Employees are always immediately vested in SIMPLE IRA contributions. This differs from a traditional qualified plan with a vesting schedule. Employer contributions are required under the selected formula, so the business needs a cash-flow estimate before adopting a plan.

Compare SIMPLE IRA with alternatives

A SIMPLE IRA is relatively straightforward to set up and maintain and generally has no annual Form 5500 filing requirement. It can suit a small business that wants payroll deferrals and an employer contribution without the administration of a traditional 401(k). The trade-off is a lower contribution ceiling than many qualified plans and less flexibility in plan design. A SIMPLE IRA cannot make participant loans, and early transfers to another retirement arrangement may be restricted during the first two participation years.

Compare SEP IRA, SIMPLE IRA, and 401(k) based on workforce, owner income, contribution goals, required employer contributions, employee access, annual administration, and owner age. A business with variable profits may prefer a different formula than one with predictable payroll. Hiring employees or joining a controlled group can change the employer eligibility analysis. Revisit plan design as the business grows.

For a scenario, count eligible employees across related businesses and review whether another plan was maintained. Then test employee eligibility by prior compensation and expected current compensation. Finally identify the plan year, contribution formula, and notice deadlines. The common mistakes are using current headcount alone, ignoring controlled-group attribution, and confusing a SIMPLE IRA with a SIMPLE 401(k).