How SECURE 2.0 Changes SIMPLE IRAs: Roth Contributions and What Employers Need to Know

Retirement plan rules rarely change, but when they do, employers and plan administrators must adapt quickly to remain compliant and maintain a competitive benefits package. The SECURE 2.0 Act, passed to expand access to retirement savings and modernize retirement plans, introduces key updates that affect SIMPLE IRAs, including the ability for employees to make Roth contributions.

These changes are significant for small businesses and their employees. Understanding how Roth contributions work, what remains unchanged, and what steps employers need to take is essential for effective plan administration in 2026 and beyond.

Understanding SIMPLE IRAs: Before SECURE 2.0

A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a retirement plan designed for small businesses with 100 or fewer employees. Employees are eligible to participate if they earned at least $5,000 in compensation during any two preceding years and are reasonably expected to earn at least $5,000 in the current year.

SIMPLE IRAs are attractive because they:

• They are easy to set up and administer compared with 401(k)s

• Require mandatory employer contributions either through matching or non-elective contributions

• Allow employees to make pre-tax salary deferrals, reducing their current taxable income

Before SECURE 2.0, employees could only make traditional pre-tax contributions to a SIMPLE IRA. Employer contributions were always pre-tax, and Roth contributions were not permitted, limiting employees’ ability to diversify the tax treatment of their retirement savings.

Roth Contributions Are Now Allowed

The SECURE 2.0 Act allows employers to offer Roth contributions for SIMPLE IRAs, meaning employees can now contribute after-tax dollars. These contributions grow tax-free, and qualified withdrawals in retirement are completely tax-free.

Key Points for Employers:

• Roth contributions are optional for employees. Employers are not required to offer them.

• Employer contributions (matching or nonelective) remain pre-tax unless the plan is specifically drafted to allow Roth designations.

• Payroll systems, reporting, and plan documents must differentiate between Roth and pre-tax contributions.

Offering Roth contributions can make a SIMPLE IRA more attractive, especially for younger employees or those early in their careers who anticipate higher future income and tax rates.

Contribution Limits for 2026

Employees can contribute up to the annual SIMPLE IRA limit, regardless of whether contributions are traditional pre-tax or Roth. For 2026:

• Employee deferral limit: $17,000

• Catch-up contribution (age 50 or older): $3,500

• Total combined contributions (deferral + catch-up): $20,500

Both traditional and Roth contributions count toward these limits combined. Employers should ensure payroll systems properly track contributions to avoid exceeding limits, which can result in penalties and corrective distributions.

Employer contributions continue to follow the standard rules:

• Matching contribution: Up to 3 percent of employee compensation

• Non-elective contribution: 2 percent of compensation for all eligible employees

These amounts are pre-tax, regardless of the employee's election to make Roth contributions.

Payroll and Administrative Considerations

Implementing Roth contributions requires employers to update administrative processes:

1. Payroll System Updates

• Track Roth vs. pre-tax contributions separately

• Ensure correct tax withholding and reporting

2. Plan Document Updates

• Amend plan documents to allow Roth contributions

• Update Summary Plan Descriptions and employee notices

3. Reporting

• Ensure W-2 reporting reflects Roth contributions

• Employer contributions remain pre-tax and are reported as such

Transparent internal processes are essential to avoid compliance issues and provide employees with accurate information about their retirement savings.

Educating Employees

Roth SIMPLE IRAs introduce a new layer of decision-making for employees. Employers should provide guidance on:

• Differences between pre-tax and Roth contributions

• Tax implications now versus retirement

• How Roth contributions affect taxable income and retirement flexibility

• Rules around withdrawals and early distributions

Education can increase participation rates and help employees make informed decisions about their retirement strategy.

Example Scenario: Pre-Tax vs. Roth Contributions

Scenario: Employee earns $60,000 per year and contributes $5,000 to a SIMPLE IRA.

• Traditional pre-tax contribution: Reduces taxable income from $60,000 to $55,000; taxes are deferred until retirement.

• Roth contribution: No current tax reduction, but qualified withdrawals in retirement are tax-free.

This choice depends on expected future tax rates and individual retirement planning goals. Offering Roth contributions gives employees flexibility to tailor their retirement savings to their financial situation.

Compliance and Pitfalls

Employers need to avoid common errors when implementing Roth contributions:

• Failing to update plan documents and notices

• Incorrectly processing Roth contributions as pre-tax

• Confusing employees about the tax treatment of employer vs. employee contributions

• Exceeding contribution limits

Using a retirement platform that automatically tracks and reports both types of contributions can help mitigate these risks.

Why These Changes Matter

SECURE 2.0 modernizes SIMPLE IRAs and gives employees more control over how their retirement funds are taxed. For employers, offering Roth contributions can:

• Make the benefits package more attractive

• Help employees plan more effectively for retirement

• Align small business plans more closely with 401(k)-style flexibility

At the same time, compliance requires careful attention to documentation, payroll processing, and education.

Taking Action

Employers should start by reviewing their SIMPLE IRA plan documents, assessing payroll systems, and preparing communications for employees about Roth contributions. Proper planning ensures a smooth transition and maximizes the benefit for both the business and its employees.

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