Who Is Eligible for a Keogh Plan and Who Isn’t

You are eligible for a Keogh plan if you have net earnings from self-employment through a sole proprietorship, a partnership in which you own more than 10%, or an LLC that has not elected corporate taxation, and you actively work in the business. Keogh plan eligibility turns on three things: how your business is organized, whether your income is earned through your own labor, and whether you are the owner rather than a common-law employee. Corporations, passive investors, and W-2 employees are shut out, even when their situations feel similar to self-employment.

Business Structures That Qualify

The Internal Revenue Code treats a self-employed individual as both the employer and an employee of their own business for retirement plan purposes.¹ That dual status is what lets an unincorporated business owner sponsor a qualified plan for themselves. Three structures fit:

Sole proprietorships. If you own and run the business by yourself without incorporating, you qualify. This is the most direct route.
Partnerships. Partners who own more than 10% of the capital or profits interest qualify as owner-employees. The partnership itself must adopt the plan; individual partners cannot set up separate arrangements based on their share of partnership income.¹
LLCs taxed as sole proprietorships or partnerships. Single-member LLCs default to sole-proprietor tax treatment, and multi-member LLCs default to partnership treatment, so most LLC owners qualify. An LLC that has elected corporate taxation does not.

Who Does Not Qualify

If your business is incorporated, a Keogh plan is off the table. C corporation shareholders and employees use corporate-sponsored plans such as 401(k)s or defined benefit pensions instead.

S corporation shareholders face a less obvious trap. Even though S-corp distributions can feel similar to partnership distributions, the IRS does not treat them as earned income for retirement plan purposes. You cannot establish a self-employed retirement plan based solely on S corporation shareholder distributions.² Any qualified plan connected to an S corporation runs off W-2 wages paid to shareholder-employees, not off the pass-through profits.

Common-law employees are also excluded, even if some of their income is treated as self-employment earnings for Social Security purposes. The IRS draws a firm line: if someone else controls how you do your work, you are an employee, and your retirement savings options run through your employer’s plan or through IRAs.³

Passive investors do not qualify either. Owning a stake in a partnership or LLC without actively working in the business does not give you a base for contributions, because Keogh eligibility is tied to income earned through personal labor.

The Income That Counts

Having a qualifying structure is necessary but not sufficient. Contributions must come from earned income tied to your work in the business. Passive income (stock dividends, interest, rental payments) does not count, and neither does a share of partnership profits when you don’t personally participate in running the business.

The contribution base is your net earnings from self-employment. You start with your business’s net profit, then subtract half of your self-employment tax and the retirement plan contribution itself.⁴ The second subtraction creates a circular calculation, which the IRS solves by having you apply a reduced plan contribution rate from worksheets in Publication 560.

The practical eligibility takeaway is simpler than the math: if your Schedule C or partnership K-1 shows a net loss, or nothing more than passive returns, you have no base to contribute against, and the plan gives you nothing that year even if your structure qualifies.

What Employees Do to Your Eligibility

You remain eligible to sponsor a Keogh plan when you hire staff, but the plan can no longer be a private vehicle for you alone. Federal nondiscrimination rules require you to include eligible employees. A worker generally becomes eligible after turning 21 and completing one year of service, defined as a 12-month period in which they work at least 1,000 hours.³⁵ Leaving eligible employees out can disqualify the entire plan, which strips tax-deferred status for everyone in it, including you.

Employee contributions to the plan are always 100% vested immediately. Employer contributions can vest right away or follow one of two graduated schedules: three-year cliff vesting or six-year graded vesting starting at 20% after year two.⁶ These rules matter for eligibility because they define the cost of keeping the plan qualified once you have staff.

Plan Types You Can Choose Once You Qualify

Eligible self-employed individuals can pick from defined contribution or defined benefit structures, and the choice affects how much your eligibility is actually worth to you.

Defined Contribution

Profit-sharing plans let you choose how much to contribute each year, up to the legal limit, with the option of contributing nothing in a lean year. This flexibility makes them the common choice for self-employed workers with variable income. Money purchase plans lock you into a fixed contribution percentage each year, and missing a required contribution triggers an excise tax. They are rarely used today because their contribution limits are now the same as profit-sharing plans, without the flexibility.⁷

For 2026, defined contribution annual additions cannot exceed the lesser of $72,000 or 100% of your compensation.⁸⁹ For self-employed individuals, compensation means your net self-employment earnings after the adjustments described above, so the effective ceiling is usually lower than $72,000 unless your business nets well over $300,000.

Defined Benefit

A defined benefit Keogh works like a traditional pension. You commit to a specific annual benefit at retirement, and an actuary calculates the contributions needed each year to fund that promise.¹⁰ The annual benefit is capped at $290,000 for 2026.⁸ Because required contributions are driven by that promised benefit rather than a flat dollar cap, self-employed people over 50 with high income and a short runway to retirement can sometimes shelter more than the defined contribution ceiling. Annual actuarial fees run roughly $1,000 to $4,000, which is why the structure fits high earners best.

A Note on the Name

If you have been told Keogh plans no longer exist, that reflects terminology rather than substance. The IRS historically called them HR-10 plans, and the “Keogh” label came from the congressman who sponsored the 1962 legislation. The agency now notes that the term is “seldom used” because federal law no longer draws a distinction between retirement plans sponsored by corporations and those sponsored by unincorporated businesses.¹¹ In practice, a Keogh plan today is any qualified plan (profit-sharing, money purchase, or defined benefit) sponsored by a self-employed person. Eligibility rules for these plans remain fully in force.

1
Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans
2
Internal Revenue Service. Retirement Plan FAQs Regarding Contributions – S Corporation
3
Internal Revenue Service. Publication 560 (2025), Retirement Plans for Small Business
4
Internal Revenue Service. Self-Employed Individuals – Calculating Your Own Retirement Plan Contribution and Deduction
5
Office of the Law Revision Counsel. 29 USC 1052 – Minimum Participation Standards
6
Internal Revenue Service. Retirement Topics – Vesting
7
Internal Revenue Service. Choosing a Retirement Plan – Money Purchase Plan
8
IRS.gov. 2026 Amounts Relating to Retirement Plans and IRAs, as Adjusted for Cost-of-Living
9
Office of the Law Revision Counsel. 26 USC 415 – Limitations on Benefits and Contribution Under Qualified Plans
10
U.S. Department of Labor. Types of Retirement Plans
11
Internal Revenue Service. Retirement Plans for Self-Employed People