Question of the Month (February 2021): Corporate Retirement Plan Eligibility

Posted by Jerry Mee, CFP®

Feb 19, 2021

This question was discussed in detail during the February 2021 episode of the BIF Bites podcast!


John, an employee of ABC, Inc., is concerned because he has not received an annual addition to the ABC profit-sharing plan for the past two years. John, who earns $100,000 per year, is age 40 and married. Which of the following are true?

  1. All defined contribution plans are subject to minimum funding rules.
  2. He cannot contribute to an IRA because he is an "active participant" in an employer plan.
  3. He can make a deductible contribution of $6,000 to an IRA.
  4. He can make a deductible IRA contribution because ABC hasn't made contributions to the profit-sharing plan.

Scroll for answer...

 

 

 

 

Correct answer: C. He can make a deductible contribution of $6,000 to an IRA.

Instructor insight:

Defined Benefit Plans (i.e., money purchase & defined benefit pension plans) are subject to minimum funding rules, but profit-sharing plans are a type of Defined Contribution Plan and are not subject to minimum funding rules.

To be considered an active participant in an employer-provided Defined Contribution Plan, no reallocated forfeitures, employer contributions, and/or employee deposits can be credited to the employee account.

In John’s scenario, if ABC, Inc. does not contribute to the profit-sharing plan in a given year, John is not considered an active plan participant (even though he is covered under the plan). Note: relocated forfeitures and employee contributions were not credited, as well.

If one spouse is an active participant and the other spouse is not an active participant, the non-active participant spouse may make a deductible IRA contribution if their combined adjusted gross income (AGI) is less than $196,000 [phased out at $206,000 (2020)]*.

For active participants, deductible IRA contributions are phased out between the AGI limits shown*.

Year
2020
Single taxpayers (active)
$65,000 - $75,000
Married filing jointly (active)
$104,000 - $124,000

*In both cases, each spouse may elect to make non-deductible contributions to their traditional IRAs if they are above phaseout limits. Phaseout numbers are provided on your CFP® exam.

CFP® Exam tip:

Determining active participation status is essential to figuring out if a deductible IRA contribution is permitted. Defined Benefit Plans and Defined Contribution Plans have different active participation criteria.

  • Defined Benefit Plans: If an employee is eligible to participate in the plan, they are considered an active participant.
  • Defined Contribution Plans: If any of the following were deposited to an employee’s account they are considered an active participant:
    • employee contributions
    • employer contributions
    • forfeitures

 

 

Topics: Practice Questions