Active Participant Status - Explained
What is Active Participant Status?
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Table of ContentsWhat is Active Participant Status?A Little More on What is Active Participant StatusActive Participant Status and Retirement SavingsReference for Active Participant StatusAcademic research on Active Participant Status
What is Active Participant Status?
Active-participant status refers to a reference to a person's involvement in different retirement plans that are employer-sponsored.
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Why Active Participant Status matters
Active-participant status is applicable to people who participate in the retirement plans below: Qualified plans like defined benefit plans, profit sharing plans, money purchase pension, 401(k) plans, or target benefit plans. 403(b) plans SIMPLE IRAs SEP IRAs 403(b) plans Qualified annuity plans Employee Funded Pension Trusts (created before June 25, 1959) A plan created solely for its employees by the U.S., by the United States' political subdivision or a State, or by an agency or United States' instrumentality or any of its subdivisions. Usually, the employer would indicate on the Form W-2 of the individual if he or she is an active participant by taking a look at the "Retirement Plan" box. In order to be sure, individuals are advised to check with their employers.
Active Participant Status and Retirement Savings
An active participant's specification has implications as to whether or not an individual is qualified for a tax deduction for a Traditional IRA contribution, and it can be difficult clarifying specific rules around the designation. According to the Appleby Retirement Dictionary, "you're eligible to take a complete deduction for your Traditional IRA contribution supposing you aren't an active participant or you're married to a participant who is active". However, if you're an active participant or even married to a participant who is active, your eligibility for deducting a Traditional IRA contribution is dependent on your tax filing status and modified adjusted gross income. "Based on the general definition, an active participant is one who receives benefits or contributions under an employer-sponsored retirement plan," according to the website, which outlines a comprehensive list of the difficult rules around ways in which active participants can or cannot qualify with many different plans. "But the rules which define who's an active participant differs among the employer-sponsored plan types, and might be dependent on when the contributions are remitted to the account of the participant (under the employer-sponsored plan)." Investors are advised by Appleby Retirement Dictionary not fall prey for the "active participant confusion trap." It states that "people have taken the IRS to court, making a challenge about their position on active participant status and they've lost." The website adds that employers "should check box 13 on their W-2 to know if they're active participants for the year. But there can be a mistake. Check with a financial or tax professional who is skilled in the retirement plans field in case there is a level of uncertainty.
Academic research on Active Participant Status
- Individual Retirement Accounts after TRA'86, Degnan, T. E., & LeRouge, C. M. (1987). Individual Retirement Accounts after TRA'86. Taxes, 65, 322.
- IRA Recharacterizations: The Time Machine of Retirement Planning, Saftner, D. V., & Fink, P. R. (2009). IRA Recharacterizations: The Time Machine of Retirement Planning. J. Retirement Plan., 12, 39.
- Individual retirement accounts after TRA'97, Naegele, R. A., & Altieri, M. P. (1998). Individual retirement accounts after TRA'97. The CPA Journal, 68(7), 22.
- Early withdrawals from individual retirement accounts (IRAs) after the 1986 Tax Reform Act, Saftner, D. V., & O'Neil, C. J. (1988). Early withdrawals from individual retirement accounts (IRAs) after the 1986 Tax Reform Act. Journal of Accounting and Public Policy, 7(2), 113-136. The Tax Reform Act of 1986 limits deductible individual retirement account (IRA) contributions to individuals who are not active participants in a qualified plan, or whose income is below certain limits, while permitting nondeductible contributions to active participants in a qualified plan and to those whose income is above the limit. Yet these restrictions do not take away the attractiveness of the IRA as an intermediate-term savings vehicle by individuals with income in excess of $30,000. To ensure that contributions to IRAs are not withdrawn prior to retirement, the law needs further revision. Two possible options are discussed.
- Employee Benefits Legislation-Another Round: The Tough Get Tougher, Dray, M. S. (1986). Employee Benefits Legislation-Another Round: The Tough Get Tougher. In Ann. Tax Conf. (Vol. 32, p. xxviii).
- Deductibility of IRA Contributions under the Tax Reform Act of 1986, Andrews, R. S. (1987). Deductibility of IRA Contributions under the Tax Reform Act of 1986. Taxes, 65, 246.