3749. What special qualification rules apply to Keogh plans?Nuco Employeercline202010-08-27T15:40:00Z2015-07-15T15:22:00Z2015-07-15T15:22:00Z36773864Summit Business Media329453214Site Map/Retirement Plans/Pension And Profit Sharing/Plan Types and Features/Keogh Plans earned income self-employed2005-01-25T00:00:00ZTaxFactsDefaultArticle116350423-00-tf1.xml425.00;#2238;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 1What special qualification rules apply to Keogh plans?140900.000000000TaxFactsDefaultArticle2010-01-15T01:17:24ZSBMEDIA\moss-admin4111dbb3-6119-41fc-9d9c-28768801cec4|87c48db3-1fac-48ba-aa9a-972c64c7a0fa|a204d380-1aff-4d04-ab1a-d7c4fae4b0093749. What special qualification rules apply to Keogh plans?A Keogh plan, which at one time was called an HR-10 plan, is a qualified plan that covers self-employed individuals such as partners in a partnership or sole proprietors. As a general rule, a qualified trust must be established by an employer for the exclusive benefit of the employer’s employees or their beneficiaries..IRC Sec. 401(a)(2). Self-employed individuals (sole proprietors, partners in a partnership, or members in an LLC) are not common law employees (Q 3825). For the purpose of allowing such individuals to participate in qualified plans and to enjoy the tax advantages available to other participants in such plans, the law confers employee status on these individuals. The IRC says that for purposes of IRC Section 401, the term “employee” includes for any taxable year an individual who has “earned income.”.IRC Sec. 401(c)(1).The term earned income means, in general, net earnings from self-employment in a trade or business in which personal services of the individual are a material income-producing factor..IRC Sec. 401(c)(2). Thus, a partner who has contributed capital to the firm but renders no personal services for it has no “earned income” from the firm and cannot participate in a qualified plan of the partnership..Treas. Reg. §1.401-10(c)(3).In arriving at the net earnings that are used to determine a self-employed individual’s own contribution, business expenses, including contributions to the plan on behalf of regular employees, are deducted. The definition of earned income of a self-employed person (which is reported on Schedule K1 for a partner) does not include a deduction for the contributions to the plan on behalf of the self-employed individual. The self-employed individual reports his or her own contribution on a Form 1040 individual income tax filing..IRC Secs. 401(c)(2)(A)(v), 404(a)(8)(C). A partner’s earned income is his or her share of partnership net income, including any draw or “salary” the partner receives..IRC Secs. 401(c)(2), 1402(a).All of the requirements for qualified retirement plans covering common law employees apply equally to plans that cover self-employed individuals. A plan covering only a sole proprietor, or a sole proprietor and his or her spouse, or partners in partnerships (and their spouses) generally is exempt from ERISA requirements..ERISA Regs. §2510.3-3(b). Calculating the ContributionThe calculation of the contribution for the self-employed individual involves two unique calculations that do not apply to common law employees: the calculation of self-employment taxes, and the contribution calculation. The earned income from a business is used to calculate the self-employment taxes that are due on the earned income. These taxes are similar to FICA taxes but are determined in a special calculation that is described in the regulations. It generally is referred to as the Section 164(f) deduction and is one half of the individual’s self-employment taxes. This reduces the amount of earned income available to calculate the self-employed individual’s own contribution.Contributions on behalf of a self-employed individual may be made only with respect to his or her “earned income” (as defined above) after a reduction for one-half of the self-employment taxes and the contribution itself. That is, the computation of the earned income that is used to determine the individual’s contributions is based on earned income less the contribution made to the plan on his or her own behalf. Thus, for example, a common law employee would need only $212,000 of compensation to support a deductible contribution of $53,000 to a defined contribution plan in 2015 ($212,000 x 25% = $53,000) (Q 3695). A self-employed individual would need net earnings of $265,000 ($212,000 plus $53,000) or more to receive a contribution of the same amount..IRC Sec. 401(d); IR-2013-86 (Oct. 31, 2013), IR-2014-99 (Oct. 23, 2014). Matching contributions that are in effect made by the partner, other than QMACs (Q 3776), are not treated as elective deferrals for purposes of the limit on such deferrals under IRC Section 402(g) (Q 3705, Q 3731)..IRC Sec. 402(g)(8). Rather, they are treated as employer contributions for all plan purposes.