Qualified Retirement Plans

Qualified retirement plans established for the employees of self-employed individuals are often referred to as “Keogh” or “H.R. 10” plans. These names originate from Congressman James Keogh, who developed the concept in 1962, and the initial congressional bill that introduced them, H.R. 10. Over the years, these plans have undergone substantial modifications, with the most significant changes introduced by the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) in 2001. Notably, the term “Keogh” has since been removed from the Internal Revenue Code.

Both sole proprietors and partners, being classified as self-employed individuals, have the option to establish a Keogh plan. However, it’s important to note that individuals classified as common-law employees of another entity cannot establish such a plan, and partners cannot create a Keogh plan solely for themselves. The primary purpose of these plans is to provide benefits exclusively for employees, including the self-employed individual, and their beneficiaries. In their capacity as employers, taxpayers can typically deduct contributions made to a qualified plan, subject to certain limitations, including contributions made for their own retirement. These contributions, along with any earnings and gains, remain generally tax-free until distributed by the plan.

Within the field of financial planning, the term “qualified retirement plan” covers a spectrum of employee benefit plans that adhere to specific criteria outlined in the Internal Revenue Code. These plans typically encompass employer-sponsored arrangements such as stock bonus, pension, and profit-sharing plans. To qualify, these plans must satisfy several stipulations, including:

• Establishment by an employer for the exclusive benefit of employees or their beneficiaries.
• Nondiscriminatory policies regarding contributions and benefits.
• Adherence to minimum standards related to age, tenure, vesting, and coverage.
• Inclusion of various provisions aimed at ensuring fairness and safeguarding the interests of plan participants.

Qualified employee plans can be structured either around the contributions allocated to them or the benefits dispensed upon retirement or another specified event. In the former scenario, the plan operates as a defined contribution plan, while in the latter, it functions as a defined benefit plan. As we go through this course, it will become apparent that this seemingly subtle differentiation carries significant implications.

There are two primary types of qualified plans: defined benefit plans and defined contribution plans. Each type is subject to its own set of regulations. While taxpayers are permitted to have more than one qualified plan, the total contributions made to all plans must not exceed the overall limits described in this course.