Active Participant Status
Someone who is engaging in a retirement plan through their employer.
Active Participant Status Details
Someone who has active participant status is currently engaging in a retirement plan through their employer and eligible to receive benefits of the plan upon retiring. An employer will usually indicate active status on the employee's Form W-2 by checking the Retirement Plan box. The employee must check box 13 on the form. The most common retirement benefit plan someone with active participant status contributes to is a 401(k) plan.
A traditional 401(k) plan is not taxed until the participant withdraws money, usually after they retire. In contrast, a Roth 401(k) plan type limits contributions based on a participant's age but can have tax-free withdrawals. Employees can make automatic contributions to their 401(k) by allowing their employer to withhold income from their payroll towards the account. Some employers also match an employee's contributions by various percentages.
An active participant status allows someone to earn certain tax benefits on plans such as a 401(k) or Simplified Employee Pension (SEP). However, it can prevent deductions on contributions to personal individual retirement accounts (IRAs). For example, if you are married to someone who has active participant status on a plan, you won't be eligible for a full deduction on your traditional IRA contribution.
Active Participant Status Example
Someone with an active participant status will be making contributions to a retirement plan. The Internal Revenue Service (IRS) determines limitations for contributions to traditional IRA accounts. For example, for 2020 and 2021, you can contribute up to $6,000 and can contribute up to $7,000 if you are at least 50 years old. This total amount of contributions is also the total you can deduct to retirement plans in 2020 and 2021.
There are also regulations on IRA deductions depending on your income amount if you or your spouse has a retirement plan at work. For example, singles in 2020 can deduct less of their contributions once their adjusted income reaches $65,000. Singles with adjusted incomes of at least $75,000 are not eligible for tax deductions.
Contributions to a 401(k) also have a maximum limit set by the IRS. For example, in 2020, employees can contribute up to $19,500. For employees at least 50 years old, they can contribute an additional $6,500, making a total of $26,000.
Significance of an Active Participant Status
Being an active participant on retirement plans such as a 401(k) is important for employees, especially since the government realized in the 1980s that social security doesn't provide adequate funds in old age. With a 401(k), employees can have their earnings invested and grow tax-free until they decide to remove it from the plan. This process is significant because it allows people to secure their financial future after retirement. It is especially true for self-employed people since a 401(k) is the main way to develop tax-deferred retirement savings.
If your company provides a match, choosing to have active participant status can also help you earn more money in the account. For instance, suppose you deposit $100 a month into your 401(k), and your employer provides a 50 percent match. This match percentage means your employer will contribute an additional $50 to your account.
Types of Active Participant Status
An active participant status refers to someone contributing to a qualified retirement plan. In the United States, a qualified plan can be created for employees by a U.S. political subdivision, State, agency, or instrumentality. Other types of qualified plans include:
- Defined benefit (DB) plans
- Profit-sharing plans
- Money purchase pension
- 401(k) plans
- Target benefit plans
- 403(b) plans
- SEP IRAs
- Savings Incentive Match Plan for Employees (SIMPLE) IRAs
- Qualified annuity plans
- Employee Funded Pension Trusts that were created before June 25, 1959
History of an Active Participant Status
In the United States, Congress created 401(k) plans after passing the Revenue Act of 1978, which included a section allowing employees to avoid deferred compensation. A benefits consultant, Ted Benna, referred to Section 401(k) in 1980 when designing tax-friendly retirement programs. He came up with the idea to help employees save pre-tax money while receiving a match from employers. His company, The Johnson Companies, was the first employer to provide a 401(k) plan.
The IRS issued rules allowing employees to contribute to their 401(k) through payroll deductions in 1981. This change initiated the popularity of 401(k) plans in companies. According to the Employee Benefits Research Institute, nearly half of all big companies were offering or considering 401(k)s by 1983.