(b)lines Ask the Experts – Definition of Participant for W-2

Michael A. Webb, Vice President, Retirement Plan Services, Cammack LaRhette Consulting, answers:    

Excellent question, as many plan sponsors often confuse this definition with the one that is uses to define a participant for 5500 reporting purposes. In a 403(b) plan, generally all active employees are participants for 5500 reporting purposes, whether they actually contributed to a 403(b) or not, because all employees are eligible to contribute to a 403(b) plan (with limited exceptions) due to a concept known as universal availability.    

However, if you look at the W-2 instructions (see below), the definition for the Retirement Plan box in Box 13 is different. For this purpose, only an employee who actually received a contribution (employer or employee) or forfeiture is counted as an “active participant” for whom the Retirement Plan box would be checked.    

The distinction is an important one, as whether or not the retirement plan box is checked may affect deductibility for any traditional IRA contributions made by a participant and his/her spouse.  

“Retirement plan box”. Check this box if the employee was an “active participant” (for any part of the year) in any of the following:  

• A qualified pension, profit-sharing, or stock-bonus plan described in section 401(a) (including a 401(k) plan). 
• An annuity plan described in section 403(a). 
• An annuity contract or custodial account described in section 403(b). 
• A simplified employee pension (SEP) plan described in section 408(k). 
• A SIMPLE retirement account described in section 408(p). 
• A trust described in section 501(c)(18). 
• A plan for federal, state, or local government employees or by an agency or instrumentality thereof (other than a section 457(b) plan). 

Generally, an employee is an active participant if covered by (a) a defined benefit plan for any tax year that he or she is eligible to participate in or (b) a defined contribution plan (for example, a section 401(k) plan) for any tax year that employer or employee contributions (or forfeitures) are added to his or her account. For additional information on employees who are eligible to participate in a plan, contact your plan administrator. For details on the active participant rules, see Notice 87-16, 1987-1 C.B. 446, Notice 98-49, 1998-2 C.B. 365, section 219(g)(5), and Pub. 590, Individual Retirement Arrangements (IRAs). You can find Notice 98-49 on page 5 of Internal Revenue Bulletin 1998-38 at www.irs.gov/pub/irs-irbs/irb98-38.pdf.  

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.