Taxing Lessons From Court Decisions

Decisions — Active Participant

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If box 13 on your Form W-2 is checked, your employer considers you to be an active participant in the employer’s defined benefit or defined contribution plan (which includes 401k plans). Why do you care? As an active participant, the deductible amount of your contributions to an Individual Retirement Account is phased out based on your filing status and adjusted gross income.

What’s the definition of an active participant? Are you an active participant if your employer doesn’t contribute to the plan? What if you’re not vested in the plan? What if you work for several employers, and only one offered a retirement plan?

The taxpayer in T.C. Summary Opinion 2014-17 (Hurd) raised those questions in an effort to claim a $5,000 IRA deduction on her 2008 federal income tax return.

The court agreed with the IRS that the definition of “active participant” included all of those scenarios (see Internal Revenue code section 219(g)), and denied the deduction.

Editorial Note: Though the taxpayer lost the benefit of the deduction in this case, she can still contribute to her IRA. Instead of a current deduction, she will have basis in the account. When she receives distributions, she can recover the basis, tax free.

Do you know the  for determining whether you’re an active participant in a retirement plan?

If you’d like a refresher on when box 13 on Form W-2 should be checked, the IRS included a Retirement Plan Checkbox Decision Chart on page 28 of the General Instructions for Forms W-2 and W-3.

Taxing Lesson: The best way to protect tax deductions is to actively participate in understanding the rules.

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Generally, you’re an active participant if you’re covered by a:

defined contribution plan (for example, a 401(k) plan) for any tax year and you are credited with any contributions or forfeitures, or

defined benefit plan for any tax year that you are eligible to participate

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