Employer-Sponsored IRAs

For small businesses and self-employed individuals, setting up a full 401(k) plan can be complex and expensive. SEP-IRAs and SIMPLE IRAs offer simpler alternatives with meaningful retirement savings capacity.

How Does a SEP-IRA Work?

A SEP-IRA allows the employer to contribute directly to employees' individual retirement accounts with minimal administrative burden.

What Are the Key Features?

• Maximum contribution (2026): lesser of $72,000 or 25% of compensation
• Compensation cap (2026): $360,000 (only the first $360,000 of an employee's pay is considered)
• Only the employer contributes; no employee elective deferrals (except under a Salary Reduction SEP (SAR-SEP) grandfathered before 1997)
• Ideal for self-employed individuals and small businesses
• Immediate 100% vesting; once the employer contributes, the money belongs to the employee
• Contributions are tax-deductible for the employer
• Very simple to establish; completed by filing the IRS SEP setup form

Who Must an Employer Cover?

Employers must generally cover employees who:

• Are at least age 21
• Have worked for the employer in at least 3 of the last 5 years
• Received at least $800 in compensation (2026)

Exam Tip: Gotchas

• SEP-IRA contributions come from the employer only. Employees do not make elective deferrals.
• Both SEP and SIMPLE IRAs vest immediately with no vesting schedule.

How Does a SIMPLE IRA Work?

A SIMPLE IRA is designed for small employers and provides both employee deferrals and mandatory employer contributions.

What Are the Eligibility Requirements?

• Available to employers with 100 or fewer employees who earned at least $5,000 in the preceding year
• The employer generally cannot maintain any other retirement plan

What Are the 2026 Contribution Limits?

• Employee deferral limit: $17,000 ($18,100 for a SIMPLE plan of an employer with 25 or fewer employees, under a SECURE 2.0 enhanced-limit election)
• Age 50+ catch-up: $4,000
• Age 60-63 super catch-up: $5,250
• Employer must either:
  • Match employee contributions dollar-for-dollar up to 3% of compensation, OR
  • Make a 2% non-elective contribution for all eligible employees (regardless of whether they contribute)

Exam Tip: Gotchas

• The $18,100 enhanced deferral limit only applies to SIMPLE plans sponsored by small employers (25 or fewer employees) that elect the higher limit. The standard $17,000 limit applies to every other SIMPLE IRA.

Why Does SIMPLE Have a 25% Early Withdrawal Penalty?

This is a key SIMPLE IRA rule:

• Distributions within the first 2 years of participation carry a 25% early withdrawal penalty (instead of the standard 10%)
• After 2 years, the standard 10% penalty applies for withdrawals before age 59-1/2
• During the first 2 years, a SIMPLE IRA can only be rolled over to another SIMPLE IRA
• After 2 years, rollovers to a traditional IRA or other qualified plan are permitted

Exam Tip: Gotchas

• SIMPLE IRA early withdrawals within the first 2 years carry a 25% penalty, not the standard 10%. The 2-year period starts from the date of the employee's first participation in the plan, not from each contribution.
• SIMPLE IRA employer contributions are mandatory: the employer must match up to 3% or make a 2% non-elective contribution.

How Do SEP-IRA and SIMPLE IRA Compare?

What Should You Check on Exam Day?

• Remembered only the employer contributes to a SEP-IRA; a SIMPLE IRA requires both employee deferrals and a mandatory employer match or non-elective contribution.
• Confirmed SIMPLE IRA eligibility is capped at employers with 100 or fewer employees; SEP-IRA has no such employer-size cap.
• Applied the SIMPLE IRA's 25% early withdrawal penalty only within the first 2 years of participation, measured from the date of first participation, not each contribution.
• Checked both SEP-IRA and SIMPLE IRA vest immediately at 100%, unlike employer plans with graded or cliff vesting schedules.