3666 / Who is an “active participant” for purposes of IRA eligibility rules and deduction limits?

Suppose an individual is an “active participant” in:

(1)   a qualified corporate or Keogh pension, profit sharing, stock bonus, or annuity plan;

(2)   a simplified employee pension or SIMPLE IRA;

(3)   a Section 403(b) tax sheltered annuity; or

(4)   a government plan.

In those instances, the individual’s deduction limit for contributions to a traditional IRA may be reduced or eliminated ( Q ). The limitation applies if the individual or the individual’s spouse was an active participant for any part of the plan year that ended with or within the taxable year.¹

Participation in Social Security, Railroad Retirement (tier I or II), or in an eligible IRC Section 457 deferred compensation plan ( Q 3581) is not taken into consideration.² Federal judges are treated as active participants.³ Active participants include any individual who is an active participant in a plan established for employees by the United States, a state or political subdivision thereof, or an agency or instrumentality of any of the foregoing.⁴

A district court judge in the state of Nebraska who participated in the Nebraska Retirement Fund for Judges was found to be an employee of the state (not an officer of the state) and, thus, was an active participant.⁵

Full-time active duty officers in the U.S. Air Force were found to be active participants.⁶ Certain members of the armed forces reserves and certain volunteer firemen covered under government plans are not considered active participants.⁷

A teacher employed by a municipal school district in Michigan was found to be an active participant in the employment-based, qualified retirement plan provided by the state based upon his being an employee of a state or political subdivision through his employment in the school district.⁸

Active participant status for a tax year must be reported by the employer on the employee’s Form W-2.

Active participant status is determined without regard to whether such individual’s rights under the plan, trust, or contract are nonforfeitable.⁹ Active participant status is further determined under the rules provided in Notice 87-16¹⁰ and Treasury Regulation Section 1.219-2 (active participant rules in effect prior to the Economic Recovery Tax Act of 1981).

In the case of a defined benefit plan, an individual who is not excluded under the eligibility provisions of the plan for the plan year ending with or within the individual’s taxable year is an active participant in the plan, regardless of whether such individual has elected to decline participation in the plan, has failed to make a mandatory contribution specified under the plan, or has failed to perform the minimum service required to accrue a benefit under the plan.¹¹ An individual in a plan under which accruals all have ceased is not an active participant. Where benefits may vary with future compensation, all accruals are not considered to have ceased.¹²

In the case of a profit sharing or stock bonus plan, an individual is an active participant if any employer contribution is deemed added or any forfeiture is allocated to the individual’s account during the individual’s taxable year.¹³ A contribution is treated as made to an individual’s account on the later of the date the contribution is made or allocated.¹⁴

If the right to an allocation is conditioned on the performance of a specified number of hours (or on the employment of the participant on a specified day) and the individual does not meet the condition for a particular year, the individual is not an active participant with respect to the taxable year within which such plan year ends.¹⁵

Where contributions to a plan are purely discretionary and no amount attributable to forfeitures or contributions has been allocated to an individual’s account by the last day of the plan year, the individual is not an active participant for the taxable year in which the plan year ends. If the employer contributes an amount after the end of the plan year for that prior plan year, however, the individual generally is an active participant for the taxable year in which the contribution is made.¹⁶

An individual is an active participant in a money purchase pension plan if any contribution or forfeiture is required to be allocated to his or her account for the plan year ending with or within his or her taxable year, even if the individual was not employed at any time during the taxable year.¹⁷

An individual is an active participant for any taxable year in which the individual makes a voluntary or a mandatory contribution.¹⁸ The individual is not treated as an active participant if only earnings (rather than contributions or forfeitures) are allocated to his or her account.¹⁹

An individual is not considered an active participant in a plan integrated with Social Security if his or her compensation is less than the minimum needed to accrue a benefit or to be eligible for an allocation in the plan.²⁰

There is no de minimis rule for active participant status. An individual may be an active participant even if no money is allocated to his or her account.²¹ Active participant status is determined without regard to whether the individual is vested in any portion of his or her benefit.