8.5 Active Participation in Employer Plan

Active participants in an employer retirement plan are subject to the phaseout rules for deducting contributions (8.4). When a married couple files jointly and only one of the spouses was an active plan participant for the taxable year, a more favorable phaseout range applies to the non-participant spouse than to the spouse who was an active participant (8.4).

An employer retirement plan means:

1. A qualified pension, profit-sharing, or stock bonus plan, including a qualified self-employed Keogh plan, SIMPLE IRA, or simplified employee pension (SEP) plan;
2. A qualified annuity plan;
3. A tax-sheltered annuity; and
4. A plan established for its employees by the United States, by a state or political subdivision, or by any agency or instrumentality of the United States or a state or political subdivision, but not eligible state Section 457 plans.

Form W-2.

If your employer checks the “Retirement plan” box within Box 13 of your 2012 Form W-2, this indicates that you were an active participant in your employer’s retirement plan during the year. If you want to make a contribution before you receive your Form W-2, check the following guidelines and consult your plan administrator for your status.

Type of plan.

Under any type of plan, if you are considered an active participant for any part of the plan year ending with or within your taxable year, you are treated as an active participant for the entire taxable year. Because of this plan year rule, you may be treated as an active participant even if you worked for the employer only part of the year. Under IRS guidelines, it is possible to be treated as an active participant in the year of retirement and even in the year after retirement if your employer maintains a fiscal year plan.

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Active Participant Status
You are treated as an active participant in a 401(k) plan, profit-sharing plan, stock bonus plan, or money-purchase pension plan if contributions are made or allocated to your account for the plan year that ends with or within your tax year. Under this rule, you may be considered an active participant for a year during which no contributions by you or your employer are made to your account; see the Examples in this section.
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The plan year rule works differently for defined benefit pension plans than for defined contribution plans such as profit-sharing plans, 401(k) plans, money purchase pension plans, and stock bonus plans. These rules are discussed below.

If you are married, and either you or your spouse is treated as an active participant for 2011, see 8.3 for the effect on the other spouse.

EXAMPLES
1. Pat O’Neil joins a company in February 2012 that has a 401(k) plan (a type of defined contribution plan) with a plan year starting July 1 and ending the following June 30. He is not eligible to participate in the plan year ending June 30, 2012. After he becomes eligible to participate in the second half of 2012, he elects to defer 6% of his remaining 2012 salary to the 401(k) plan for the plan year ending June 30, 2013. Although he makes elective deferrals to the plan during 2012, he is not considered an active participant for 2012 because his contributions were made for the plan year ending in 2013. He will be considered an active participant in 2013 even if he decides not to defer any part of his 2013 salary for the plan year ending June 30, 2014.
2. Clarise Jones’s employer has a defined benefit pension plan with a plan year starting July 1 and ending the following June 30. She is not excluded from participating. If she retired during September 2012, she is considered an active participant for 2012 because she was eligible to participate during the plan year ending June 30, 2012. She will also be considered an active participant for 2013. Although she will retire only a few months into the plan year starting July 1, 2012, and ending June 30, 2013, she will still be eligible to participate during part of that plan year (July 1, 2012, until retirement in September 2012), and since the 2012–2013 plan year ends within her 2013 tax year, she will be considered an active participant for 2013.

Defined benefit pension plans.

You are treated as an active participant in a defined benefit pension plan if, for the plan year ending with or within your taxable year, you are eligible to participate in the plan. Under this rule, as long as you are eligible, you are treated as an active participant, even if you decline participation in the plan or you fail to make a mandatory contribution specified in the plan. Furthermore, you are treated as an active participant even if your rights to benefits are not vested.

Defined contribution plan.

For a defined contribution plan, you are generally considered an active participant if “with respect to” the plan year ending with or within your taxable year (1) you make elective deferrals to the plan; (2) your employer contributes to your account; or (3) forfeitures are allocated to your account. If any of these events occur, you are treated as an active participant for that taxable year, even if you do not have a vested right to receive benefits from your account.

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