Active Participant Status

An active participant, for the purposes of retirement planning, is an individual who is eligible to receive benefits from a qualified retirement plan or to participate in such a plan. The active participant status will determine to what extent an employee can contribute to a traditional IRA, if they can contribute at all.

Marguerita M. Cheng, Certified Financial Planner
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There are many employees who qualify and/or participate in employer-sponsored retirement plans like the 401(k) but still desire to make contributions to an IRA to build additional retirement savings.

With a Roth IRA, there are no limitations for such employees, as long as their modified adjusted gross income (MAGI) ordinarily permits them to participate in a Roth IRA.

However, for traditional IRAs, employees with employer-sponsored plans — also known as active participants — will face certain restrictions that determine whether they can participate and to what extent.

What Does Active Participant Status Mean?

In retirement planning, an active participant is an individual who is eligible to receive benefits from a qualified retirement plan or take part in such a plan.

In other words, an active participant is a person covered by a retirement plan and/or someone who is due to receive benefits from such plans once they satisfy the necessary conditions.

What Types of Retirement Plans Does Active Participant Status Apply To?

Only qualified retirement plans make someone an active participant. These are employer-sponsored plans that allow you to contribute pre-tax funds, grow those funds and their earnings tax-free and pay taxes only upon withdrawals.

The following are qualified retirement plans:
  • 401(k) Plans
  • 403(b) Plans
  • Money Purchase Pension Plans
  • Cash Balance Pension Plans
  • SEP IRAs
  • Keogh Plans
  • Employee Stock Ownership Plans (ESOPs)
  • Profit-sharing plans
  • Stock Bonus Plans

Active Participants and IRAs

For Roth IRAs, the active participant status does not apply. Anyone whose modified adjusted gross income (MAGI) is less than $144,000 for single filers, $214,000 for joint filers and $10,000 for married couples filing separately can contribute to a Roth IRA, irrespective of their status as active participants.

However, determining whether an employee is an active participant is important in determining whether, or to what extent, they can participate in a traditional IRA.

For 2022, the following IRS rules apply to active participants regarding participation in a traditional IRA:
An active participant that is married and filing jointly:
Can max out the deduction to a traditional IRA ($6,000 for those younger than 50 and $7,000 for those older than 50) if MAGI is less than $109,000. Can make a partial deduction if MAGI is between $109,000 and $129,000. Can’t make any deduction if MAGI exceeds $129,000.
A traditional IRA holder who is married and filing jointly, but the spouse is the active participant:
Can max out the deduction if MAGI is less than $204,000. Can make a partial deduction if MAGI is between $204,000 and $214,000. Can’t make any deduction if MAGI exceeds $214,000.
An active participant who is a single filer:
Can max out the deduction if MAGI is less than $68,000. Can make a partial deduction if MAGI is between $68,000 and $78,000. Can’t make any deduction if MAGI exceeds $78,000.
Those married and filing separately, and either spouse is an active participant:
Cannot max out deductions at all. Can make a partial deduction if MAGI is less than $10,000. Can’t make any deduction if MAGI exceeds $10,000.

Before contributing to a traditional IRA, be sure of whether the IRS considers you an active participant. If in doubt, talk to your financial advisor.

Active Participants and 401(k)s

According to the IRS, “If your plan is a 401(k) plan, active participants include those individuals who are employed at any time during the year in question and are eligible to participate in the plan even if they elect not to make contributions to the plan.” This does not include participants whose employment was terminated in prior years.

In essence, if a current employee qualifies for a 401(k), they are an active participant. The same rule also applies to 403(b)s and SIMPLE IRAs.

Active Participant Status Determination for Other Plans

For defined-benefit plans, an employee is an active participant if they are not disqualified according to the eligibility conditions of the plan for the plan year ending with or within the individual’s taxable year.

Such employees remain active participants even if they decline to participate, do not make mandatory contributions or have failed to perform certain actions needed for benefits to accrue.

In other words, they are active participants if they are eligible.

For SEP IRA, stock bonus plans and profit-sharing plans, the employee is an active participant in the year the contribution is deposited into their account.

In contrast, for money purchase plans, the employee is an active participant in the year the contribution is made or the forfeiture is allocated, irrespective of when it was deposited into their individual account.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: July 17, 2022

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