What Is Active-Participant Status?
Active-participant status is a reference to an individual's participation in various employer-sponsored retirement plans.
Understanding Active-Participant Status
Active-participant status applies to individuals who participate in the following retirement plans:
- Qualified plans, such as profit-sharing plans, defined benefit plans, money purchase pension or target benefit plans, and 401(k) plans
- SEP IRAs
- SIMPLE IRAs
- 403(b) plans
- Qualified annuity plans
- Employee Funded Pension Trusts (created before June 25, 1959)
- A plan established for its employees by the United States, by a State or political subdivision of the United States, or by an agency or instrumentality of the United States or any of its subdivisions
Typically, the employer will indicate on the individual's Form W-2 if the individual is an active participant by checking the "Retirement Plan" box. Individuals should check with their employers to be sure.
Active-Participant Status and Retirement Savings
The specification of an active participant has implications as to whether or not someone is eligible to claim a tax deduction for a contribution to a traditional IRA, and certain rules around the designation can be hard to clarify.
"You are eligible to take the full deduction for your traditional IRA contribution if you are not an active participant, or married to an active participant," according to Appleby Retirement Dictionary. "On the other hand, if you are an active participant or married to an active participant, your eligibility for deducting a traditional IRA contribution depends on your modified adjusted gross income and tax filing status."
"The general definition is that an active participant is an individual who receives contributions or benefits under an employer-sponsored retirement plan," according to that website, which outlines a detailed list of the complex rules around how active participants can or can't qualify with various different plans. "But the rules that define who is an active participant varies among the types of employer-sponsored plans, and may depend on when the contributions are made to the participant’s account (under the employer-sponsored plan)."
Appleby Retirement Dictionary advises retirement investors not to fall into the "active participant confusion trap." It notes that "individuals have taken the IRS to court, challenging their position on active participant status and they have lost."
The site adds that employers "are required to check box 13 on your W-2 if you are an active participant for the year. But mistakes can be made. Check with a tax or financial professional who is an expert in the retirement plans field if there is any degree of uncertainty."