Active Participant or Not?
If a 401(k) plan returns the full 401(k) contribution for the previous year due to the plan failing the non-discrimination tests is the employee considered an active participant in the 401(k) for that year or not. If not, he can deduct an IRA contribution if is AGI is below 159k.
The question here is what qualifies you as an active participant. The fact that you went through the motions and were not allowed to keep your contributions in the plan after all or do you have to be allowed to contribute and your contributions are allowed to stay in the plan?
Permalink Submitted by Alan Spross on Wed, 2008-03-19 22:05
Active participant status is complex and can be affected by several variables such as employer contributions made after the plan year ends, whether the plan year coincides with calendar year, etc.
The IRS will be looking at the retirement plan participant box on the W-2. If it is not checked, the employee can be considered a non participant. If it is checked, find out why in case there was an error.
159,000 is the 2008 figure for non participant deduction phaseout to begin; it was 156,000 for 2007, which I imagine is the year you are presently concerned with.
Permalink Submitted by Denise Appleby on Fri, 2008-03-21 01:27
Agreed… For instance, in the case you present, the individual would still be an active participant even though the excess amount is returned to him. See IRS Notice 87-16 available here http://www.retirementdictionary.com/active-participant.htm , which states in part [quote]For purposes of determining active participant status, if an individual chooses to make an elective deferral to a plan, the individual is an active participant for the plan year as of which the deferral ontribution is allocated, regardless of whether the contribution remains in the individual’s account.[/quote]