What Is Active Participant Status?
Active participant status is a reference to an individual's current participation in various employer-sponsored retirement plans such as 401(k) plans or defined-benefit pensions, and who is, therefore, eligible to receive plan benefits upon retirement.
Having this status provides certain tax benefits, but also limits your potential ability to take a tax deduction on contributions made to a personal individual retirement account (IRA).
- Active participant status refers to an individual who is currently taking part in a qualified retirement plan.
- Active participant status refers to someone who is contributing and/or eligible to receive plan benefits.
- Active participants can receive generous tax benefits on contributions made to accounts such as a SEP or 401(k) plan.
- However, active participant status may limit the tax-deductibility of your traditional IRA contributions per the IRS.
Understanding Active Participant Status
An active plan participant has the right to receive benefit payments from a pension plan, whether it is a defined-benefit (DB) or a defined-contribution (DC) pension plan, as long as the requirements under the plan's contract have been fulfilled.
Active participant status applies to individuals who are currently participating in one or more of the following types of retirement plan:
- Qualified pension plans, such as profit-sharing plans, defined benefit (DB) plans, money purchase pension, or target benefit plans.
- 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
Under most defined-benefit pension plans, the member is required to complete a minimum number of years of service in order to qualify for their maximum allowable pension. The tax law definition of an "active participant" for a company plan could thus include employees not currently participating in the employer's plan.
Active Participants and IRA Contributions
The specification of an active participant has important 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. If you and/or your spouse are active participants for a given year, you may need to perform a calculation to determine whether you are able to deduct your IRA contributions for that year. If you are not able to deduct the full amount, you may be able to deduct a smaller portion, depending on your modified adjusted gross income (MAGI).
Tax Deduction Phase-Out Ranges
Below are the income phase-out ranges for deducting a contribution to a traditional IRA in 2020 and 2021 as outlined by the Internal Revenue Service (IRS).
In 2020, if you're single and covered by a workplace retirement plan and you earn between $65,000 to $75,000 in income, you will either be able to deduct a portion of your traditional IRA contribution until it's completely phased out once you earn beyond the income range. For 2021 IRA contributions, the income phase-out range is slightly higher: $66,000 to $76,000.
In 2020, if you are married, filing jointly, or a qualified widow(er), and your spouse is covered by a workplace plan, the income limit range is $104,000 to $124,000, and in 2021, the range is $105,000 to $125,000.
However, if you're an IRA contributor who isn't covered by a workplace retirement plan, but you're married to someone who is covered, the income phase-out range for you both as a couple is $196,000 and $206,000 in 2020 and $198,000 to $208,000 for 2021. For example, in 2021, your tax deduction begins to get reduced at $198,000, and the deduction gets eliminated at $208,000 and higher.
The IRS adds that employers are required to check box 13 on your W-2 if you are an active participant for the year, where the employer will check off the "Retirement Plan" box. Individuals should check with their employers to be sure. Ultimately, you may want to consult with your tax professional for assistance with determining whether your IRA contribution is deductible.
What the Experts Say
"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."