Chapter 6 — Contributions

A Keogh defined contribution plan — typically structured as a profit-sharing or money purchase pension plan — is subject to the same annual additions limits that apply to all DC plans. Annual additions (employer contributions + employee contributions + forfeitures) to any participant’s account cannot exceed the lesser of:

• 25% of the participant’s compensation (for self-employed individuals, “compensation” means earned income reduced by the Keogh contribution and one-half of SE tax), or
• $72,000 (2026, inflation-adjusted).

Compensation is further capped at $360,000 per participant (2026) for contribution calculation purposes.

If the employer contributes more than the deductible amount, the excess may be carried forward and deducted in a future year. However, the excess is subject to a 10% excise tax for each year it remains in the plan — the same penalty that applies to excess SEP contributions.

In a partnership profit-sharing Keogh, contributions are allocated among all participants — both employee and owner — based on each participant’s share of the business’s net income after the Keogh contribution itself is deducted.

Employers may continue to make Keogh contributions on behalf of permanently and totally disabled non-highly compensated employees. These contributions:

• are subject to the same overall limits, based on annualized income for the last year of employment,
• must be immediately and fully vested, and
• if discretionary, may only be made for non-highly compensated disabled employees.

If the plan document provides for contributions over a fixed and determinable period for any employee who becomes disabled, the employer may contribute on behalf of highly compensated disabled employees as well.

Since 1982, Keogh defined benefit plans have been subject to the same benefit limitation rules that apply to all qualified DB plans. To maintain qualified status, the highest annual benefit under a Keogh DB plan is limited to the lesser of:

• 100% of the employee’s average compensation for the three highest consecutive calendar years as an active participant, or
• $290,000 (2026, inflation-adjusted).

For Keogh DB purposes, an owner-employee’s “compensation” is defined as earned income before deductions allowable for self-employed individuals — including bonuses and other taxable distributions, but excluding deferred compensation or amounts receiving special tax treatment.

The deductible contribution to a Keogh DB plan is generally the amount actuarially required to fund the plan’s promised benefits, using IRS-approved actuarial methods. However:

• Deductions may not exceed earned income for the self-employed individual — the Keogh contribution cannot create or increase a net operating loss.
• Deductions are not allowed for Keogh contributions used to purchase life, accident, health, or other insurance.
• Because defined benefit pension plans are classified as pension plans, they are subject to a 25% of covered participant compensation deduction ceiling (the same as money purchase pension plans).

For a sole proprietor, Keogh contributions on behalf of both the owner and employees are deducted on the owner’s personal income tax return (Form 1040, Schedule 1) as an above-the-line deduction.

For a partnership, contributions on behalf of employees are deducted at the partnership level, reducing partnership income before it is allocated to partners. Partners do not personally deduct these amounts — the deduction flows through to them as a reduction in their distributive share of partnership income.

Owner-employees may not claim a Keogh deduction that creates or increases a net operating loss for the business. In other words, the Keogh contribution is deductible only if the business is profitable. If a contribution is made during a loss year, it may not be deducted as a business expense — it may only be deducted as a nonbusiness expense, which is permitted only if the owner has offsetting nonbusiness income.

Both cash-basis and accrual-basis taxpayers may make Keogh contributions for a tax year at any time up to the due date of the income tax return for that year, including extensions.

Although contributions may be made up to the tax return deadline, the Keogh plan itself must have been established by December 31 of the contribution year. A contribution made by the filing date will not be deductible for the prior year unless the plan was in existence and met all qualification requirements throughout that prior year.

Taxpayers who miss the December 31 Keogh establishment deadline have a fallback: a SEP-IRA can still be established and funded up to the tax return due date, providing an alternative path to a prior-year retirement contribution deduction.

Keogh plans may integrate contributions with Social Security — also called permitted disparity. Because owner-employees pay Social Security taxes on behalf of their employees (which ultimately fund a portion of those employees’ retirement), integration rules allow for proportionately reduced contributions for employees whose wages fall below the Social Security taxable wage base. The integration rules are designed to ensure that all covered employees receive at least a minimum benefit. See Chapter 1 for a detailed discussion of Social Security integration.

Owner-employees are subject to the same prohibited transaction rules that apply to all qualified plan participants and fiduciaries. Owner-employees may not:

• borrow any part of the income or principal of the plan,
• be paid any compensation for services rendered to the plan, or
• buy from or sell to the plan any property (whether buying plan property or selling personal property to the plan).

These restrictions also apply to members of the owner-employee’s family and to any corporation controlled by the owner-employee.

Keogh plans that cover employees (in addition to the self-employed owner) are generally subject to ERISA’s reporting and disclosure requirements. However, the Department of Labor has taken the position that a Keogh plan covering only self-employed individuals (and no common-law employees) is not an “employee” pension benefit plan and is therefore exempt from most ERISA reporting, disclosure, and fiduciary requirements.

Regardless of coverage, all Keogh plans must file an annual report and must comply with the prohibited transaction rules.