W-2 for one day of work, disqualified IRA deduction?

Submitted by Mark Hilgenberg on Fri, 2016-07-01 19:47

We have a client who worked as an actor for one day, he was issued a W-2, paid the taxes etc. The spouse works but dos not have a 401k plan so they both made the max deductible IRA contribution. Now the IRS came back and disqualified the deduction since the company the client worked one day for has a 401k. This was for 2014 but the same issue will happen in 15 and 16 since he receives a few dollars in residuals.

The total pay over 3 years is like $2,000 but this will cost them about $12k in taxes. Any way around this?



Submitted by Alan - IRA critic on Fri, 2016-07-01 20:15

I assume that the retirement plan box on his W-2 has been checked. But that does not mean that the employer was necessarily correct in checking that box. Here is the actual criteria for active participation in the plan. Did he make a contribution or receive a contribution?  Does he have any balance?

401(k), 403(b), Salary deferral SEP, SIMPLE IRA

The individual is an active participant if the individual elects to defer compensation (make salary deferral contributions) to the to a plan If the individual is eligible to make salary deferral contributions, but declines to make such salary deferral contributions for a year, and no other contributions or forfeitures are allocated to such individual’s account for the plan year ending with or within the individual’s taxable year, the individual is not an active participant for that year.

 

Submitted by Mark Hilgenberg on Fri, 2016-07-01 20:21

Thanks Alan, yes, the box was checked. No, he did nat make any contributions. 

Submitted by Alan - IRA critic on Fri, 2016-07-01 20:35

He would still be a participant if his account received any contributions even if he did not make any. Assuming that none of these things happened, the IRS will still need to be convinced that the W-2 is incorrect. If one spouse is a participant and the other is not, then income limits come into play for the non participating spouse. Therefore, the status for each spouse must be determined and if either one IS a participant, then the modified AGI limits must be checked to determine if either spouse can take the deduction. If a spouse cannot take the deduction, a Roth contribution is better than a non deductible contribution, if income is not too high to qualify. Or, there is still time to have the 2015 contribution returned if none of the other options sounds good.

Submitted by Mark Hilgenberg on Fri, 2016-07-01 22:31

The only contribution we can think of is that he is a SAG/AFTRA union actor and sometimes producers have to fund union pensions, but not qualified plans. Would that count? He received no 5498s. 

Submitted by Alan - IRA critic on Sat, 2016-07-02 00:51

5498 forms are only issued for IRA contributions. If his income qualifies for credit to a defined benefit plan, that is also considered active participation in a retirement plan and would cause the W 2 to show the retirement plan box checked. Here is the definition of participation for DB plans:

Defined Benefit Plan

The  individual is an active participant if he/she  is not excluded under the eligibility provisions of the plan for the plan year ending with or within the individual’s taxable year ,regardless of whether the 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.

 

Submitted by Nathan Calimbo on Thu, 2018-12-13 13:40

It sounds exactly like a contractor work. Why did he was paid with the W-2 instead of 1099?

Submitted by Jane Ostin on Sun, 2021-01-24 10:48

He didn’t have to pay with the W-2, especially if he ia an active participant and received any contributions

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