1. HR 10 (Keogh) Plan Chapter 22 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company1 What is it? a qualified retirement plan that covers a sole proprietor or partner who works in his or her own business in general, works like any qualified plan

2. HR 10 (Keogh) Plan Chapter 22 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company2 When is it indicated? self-employed business owner needs long-term capital accumulation for retirement owner of unincorporated business wants a plan that provides retirement benefits for regular employees as well as for business owner need to shelter self-employment income from income tax

3. HR 10 (Keogh) Plan Chapter 22 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company3 Advantages 1.Keogh contributions are deducted from gross income and tax deferred until funds withdrawn at later date 2.investment income in Keogh plan tax deferred 3.plan loans to owner-employees subject to same rules as are applied to regular employees 4.some lump-sum benefits eligible for special 10 year averaging

4. HR 10 (Keogh) Plan Chapter 22 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company4 Advantages 5.limits on Keogh plan contributions are more liberal than IRA contributions 6.business employees must participate in the plan 7.certain employers may be eligible for $500 business tax credit of up to $500 for ‘qualified startup costs’

5. HR 10 (Keogh) Plan Chapter 22 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company5 Disadvantages 1.Keoghs involve cost and complexity of qualified plans; can minimize these factors if use prototype plans 2.large number of employees may increase costs required to meet nondiscrimination rules 3.10% penalty plus tax on amounts withdrawn before age 59½

6. HR 10 (Keogh) Plan Chapter 22 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company6 Disadvantages 4.Keogh plans follow qualified plan distribution rules; for more than 5% owner, distributions must begin by April 1 of year after attain age 70½, regardless of retirement status 5.life insurance for self-employed person is treated less 6.favorably than for regular employees

7. HR 10 (Keogh) Plan Chapter 22 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company7 Types of Keogh Plans typical plan is designed as profit share without a fixed contribution formula, but other forms may be used defined contribution plan –tax deductible contributions to limit of 25% of total payroll of plan participants –flexible contributions –compensation base limited to $245,000 (2009)

8. HR 10 (Keogh) Plan Chapter 22 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company8 Types of Keogh Plans 401(k) plan –can establish a solo 401(k) plan –matching contributions to 401(k) plan for self-employed person are not treated as elective employer contributions; thus not subject to $16,500 (2009) annual limits

9. HR 10 (Keogh) Plan Chapter 22 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company9 Types of Keogh Plans money purchase plan –fixed annual contribution formula of up to 25% of earned income –mandatory contributions

10. HR 10 (Keogh) Plan Chapter 22 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company10 Types of Keogh Plans defined benefit plan –advantageous for older employee –allows higher contribution level than defined contribution plans

11. HR 10 (Keogh) Plan Chapter 22 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company11 How are Keoghs Different from Other Qualified Plans? since self-employed individuals are technically not “employees,” some special rules exist regarding treatment of –earned income –life insurance

12. HR 10 (Keogh) Plan Chapter 22 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company12 How are Keoghs Different from Other Qualified Plans? earned income –for self-employed, ‘earned income’ takes the place of ‘compensation’ in applying qualified plan rules –earned income is net income from business after all deductions; deduction for 1/2 of self-employment tax must be taken before taking deduction for Keogh plan contributions

13. HR 10 (Keogh) Plan Chapter 22 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company13 How are Keoghs Different from Other Qualified Plans? life insurance –can be used as an incidental benefit in a plan covering self- employed –the pure life insurance element of an insurance premium is NOT tax deductible

14. HR 10 (Keogh) Plan Chapter 22 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company14 How are Keoghs Different from Other Qualified Plans? life insurance (cont’d) –only the portion of the premium that exceeds the pure protection value of the insurance is deductible –Table 2001 costs, although included in income because they were nondeductible, are NOT includible in cost basis

15. HR 10 (Keogh) Plan Chapter 22 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company15 Tax and ERISA Implications Keogh plans generally have same tax and ERISA implications as regular qualified plans annual reporting requirement for qualified plans simplified for many Keogh and other small plans

16. HR 10 (Keogh) Plan Chapter 22 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company16 Alternatives incorporate the business and adopt a corporate plan –owner then becomes shareholder and employee of corporation –may result in higher taxes –advantage of corporate plans over Keogh plans is minimal

17. HR 10 (Keogh) Plan Chapter 22 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company17 Alternatives Simplified employee pension (SEP) or SIMPLE IRA –may be simpler to adopt than Keogh plan –SEP can be adopted as late as the individual’s tax return filing date, past the deadline to adopt a new Keogh plan

18. HR 10 (Keogh) Plan Chapter 22 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company18 Alternatives tax deductible IRA contributions –may be adopted as late as the individual’s tax return filing date, past the deadline to adopt a new Keogh plan –IRA contribution limits are much lower than Keogh plan limits

19. HR 10 (Keogh) Plan Chapter 22 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company19 How to Install a Plan Keogh plans follow installation procedure for qualified plans ‘prototype plans’ designed by bank, insurance company, mutual fund, or other financial institution are common –institution does most of the paperwork to install plan at low or no cost –self-employed must keep most or all funds invested with that institution

20. HR 10 (Keogh) Plan Chapter 22 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company20 True or False? 1.An owner of an unincorporated business can utilize a Keogh plan. 2.A person who has self-employment income as well as income from employment can use a Keogh plan to defer taxes on the self-employment income. 3.Keogh plan limits are more generous than the limits on an IRA.

21. HR 10 (Keogh) Plan Chapter 22 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company21 True or False? 4.A Keogh plan becomes more costly to administer the more employees that are covered. 5.A defined benefit plan cannot be used as a Keogh. 6.“Earned income” for the self-employed does not include a deduction for Keogh plan contributions. 7.Life insurance in a Keogh plan is treated the same way as it is in any other qualified plan.

22. HR 10 (Keogh) Plan Chapter 22 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company22 Discussion Question Suppose a self-employed person has a Keogh plan. Discuss what would happen in each of the following situations: a)plan participant becomes disabled b)plan participant dies c)plan participant wants to initiate and fund a traditional IRA or Roth IRA d)plan participant is also covered under a corporate plan as an employee