Questions and Answers

An individual is an active participant if:

• The individual or his/her employer contributes or the employer is required to contribute to the employer’s defined contribution plan
• Benefits accrue on that individual’s behalf in his/her employer’s pension or defined benefit plan

An employer will treat an individual as an active participant for the entire year if he/she was an active participant at any time during the year. An individual is not an active participant if a plan only allocates earnings to his/her account or if he/she only receives benefit distributions from a plan.

Under IRC Section 219(g)(5), active participation can occur only in the following types of plans:

• Plans qualified under IRC Section 401(a), including pension, profit-sharing, money purchase, stock bonus, and 401(k) plans
• Qualified annuity plans under IRC Section 403(a)
• Tax-sheltered annuity plans under IRC Section 403(b)
• Simplified employee pension (SEP) plans under IRC Section 408(k)
• Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRA plans under IRC Section 408(p)
• Local, state, or federal government plans, but not a deferred compensation plan under IRC Section 457(b)

Under IRC Section 219(g), three factors affect traditional IRA contribution deductibility:

1. An individual’s or his/her spouse’s active participation in certain employer-sponsored retirement plans
2. An individual’s federal income tax return filing status
3. An individual’s modified adjusted gross income (MAGI)

An active participant might not be eligible for a full deduction of his/her regular or spousal traditional IRA contributions.

The easiest way for an employee to check for his/her active-participant status is IRS Form W-2, Wage and Tax Statement. An employer is required to check a box labeled “Retirement plan” if an employee is an active participant in that employer’s plan. The instructions for Form W-2 and IRS Notice 87-16 provide some guidelines for employers to determine their employees’ active-participation status.

Beyond the information provided on Form W-2, the complexities of the various types of employer retirement plans make it virtually impossible for an IRA custodian/trustee to determine active-participation status. An individual with questions on his/her active participant status should direct those questions to the employer sponsoring the plan. A self-employed individual’s tax professional can help make the determination.