Keogh Plan

Introduction

As companies expand globally and embrace remote work, HR and finance leaders face the challenge of managing international teams while simplifying processes around hiring, payroll, and compliance. One option that may come up is the Keogh plan – a tax-deferred pension plan available to self-employed individuals or unincorporated businesses. In this article, we’ll dive into what Keogh plans are, how they work, and key considerations for employers.

Keogh plan definition

A Keogh plan is a retirement plan that can be set up by self-employed individuals and unincorporated businesses such as sole proprietorships, partnerships, and LLCs. Contributions are made with pre-tax dollars, up to specific annual limits.

There are two main types of Keogh plans:

1. Defined contribution plans

• Profit-sharing plans: Companies can contribute up to 25% of compensation or $66,000 (as of 2023)
• Money purchase plans: Require a fixed percentage of income to be contributed each year

1. Defined benefit plans

• Provides a specified benefit amount at retirement, based on salary and years of service
• Maximum annual benefit is $265,000 in 2023

Keogh plans were originally named after U.S. Representative Eugene Keogh who helped create the Self-Employed Individuals Tax Retirement Act of 1962. However, the IRS no longer uses the term “Keogh plan” officially, instead referring to them as qualified plans or HR 10 plans.

What is another name for a Keogh Plan

1. HR-10 plan or HR 10 plan – This is the term now used by the Internal Revenue Service (IRS) to refer to Keogh plans.
2. Qualified plan – The IRS also refers to Keogh plans as “qualified plans”.
3. Self-employed retirement plan – This term is sometimes used to describe Keogh plans since they are designed for self-employed individuals.
4. Qualified retirement plan for self-employed individuals – This is another descriptive term used by the IRS.
5. Self-Employed Individuals Tax Retirement Act plan – This refers to the original legislation that created Keogh plans, though it’s less commonly used now .

It’s worth noting that while “Keogh plan” is still a widely recognized term, it’s considered somewhat outdated. The distinction between corporate and self-employed retirement plans was largely eliminated by tax law changes in 2001, leading to the adoption of more general terms like “qualified plan”.

Keogh Plan vs 401(k)

While Keogh plans and 401(k)s are both tax-advantaged retirement plans, there are some key differences:

• Contribution limits: Defined benefit Keogh plans have no contribution limits, while 401(k)s are limited to $22,500 in employee contributions (as of 2023)
• Employer contributions: Keogh contributions are generally made solely by the employer, while 401(k)s allow both employee and employer contributions
• Complexity: Keogh plans tend to be more complex to set up and maintain compared to 401(k)s

Keogh Plans vs. IRAs

Keogh plans are intended for self-employed individuals and unincorporated businesses, while IRAs can be used by any individual with earned income. Keogh plans also have much higher contribution limits compared to IRAs.

Eligibility

• Keogh Plans: Available to self-employed individuals and unincorporated businesses.
• IRAs: Available to anyone with earned income, including employees and self-employed individuals.

Contribution Limits

• Keogh Plans:
• Defined contribution: Up to $66,000 or 25% of compensation for 2023 ($69,000 for 2024).
• Defined benefit: Up to $265,000 for 2023 ($275,000 for 2024).
• Traditional/Roth IRAs: $6,500 for 2023 ($7,000 for 2024), with an additional $1,000 catch-up contribution for those 50 and older.

Tax Treatment

• Keogh Plans: Contributions are tax-deductible, and earnings grow tax-deferred until withdrawal.
• Traditional IRAs: Similar to Keogh Plans – tax-deductible contributions and tax-deferred growth.
• Roth IRAs: Contributions are made with after-tax dollars, but qualified withdrawals are tax-free.

Complexity and Administration

• Keogh Plans: More complex to set up and administer, often requiring professional assistance.
• IRAs: Generally simpler to set up and manage, with less paperwork involved.

Employer Involvement

• Keogh Plans: Employer-sponsored and funded.
• IRAs: Individual accounts, though employers can contribute to SEP IRAs.

Withdrawal Rules

• Keogh Plans: Generally, withdrawals before age 59½ incur a 10% penalty, with required minimum distributions (RMDs) starting at age 73.
• Traditional IRAs: Similar to Keogh Plans.
• Roth IRAs: No RMDs required during the owner’s lifetime, and qualified withdrawals are tax-free.

Investment Options

• Keogh Plans: Can invest in a wide range of securities, similar to IRAs.
• IRAs: Offer a broad range of investment options, including stocks, bonds, mutual funds, and ETFs.

Suitability

• Keogh Plans: Best for high-earning self-employed individuals or small business owners looking to save large amounts for retirement.
• IRAs: Suitable for a wider range of individuals, including those with lower incomes or those looking for simpler retirement savings options.

Advantages of Keogh Plans

• Flexibility in plan structure (defined benefit or defined contribution)
• High contribution limits, especially for defined benefit plans
• Contributions are tax-deductible
• Investments grow tax-deferred until retirement

Disadvantages of Keogh Plans

• Complex to set up and maintain, often requiring professional assistance
• More paperwork and administrative costs compared to alternatives like SEP IRAs
• Mandatory annual contributions for some plan types
• Penalties for not meeting minimum funding standards

Considerations for Employers

Eligibility

To be eligible for a Keogh plan, individuals must have self-employment income. The plan must also be offered to any employees over 21 who have worked at least 1,000 hours in a year. Plans must be set up by the end of the tax year.

Contributions and Distributions

Contribution limits vary based on the specific type of Keogh plan, but are generally higher than other retirement plans. Withdrawals can be made starting at age 59 1/2, and required minimum distributions begin at age 72. Early withdrawals are subject to a 10% penalty.

Costs and Administration

Keogh plans tend to have higher setup and maintenance costs compared to alternatives like SEP IRAs or solo 401(k)s. Annual filing of Form 5500 is required, and many plans need to be managed by financial professionals.

Keogh Plans and Remote Work

With the rise of remote and flexible work arrangements, some employers are looking at Keogh plans as an option for providing retirement benefits to self-employed contractors or remote workers classified as independent contractors.

However, it’s important to note that Keogh plans are designed for self-employed individuals and unincorporated businesses. Misclassifying employees as contractors to avoid providing benefits can lead to serious penalties.

Before implementing any international hiring or benefits strategy, it’s crucial to understand the legal and tax implications in each country where your team members reside. Working with a knowledgeable partner like Remote can help you navigate global employment complexities.

Conclusion

Keogh plans offer a flexible, high-contribution retirement option for self-employed individuals and unincorporated businesses. However, their complexity and costs may make them less appealing compared to alternatives like SEP IRAs or solo 401(k)s for many employers.

As with any global workforce decision, it’s important to carefully weigh the pros and cons and seek expert guidance to ensure compliance. By understanding options like Keogh plans, HR and finance leaders can make informed choices to support their international teams while streamlining global employment processes.