Here is an issue that recently came up in an IRS CP-2000 notice sent to one of my clients.
The client in this situation is a married couple. The wife is employed full-time, earning a substantial salary, and is an active participant in her employer's pension plan. The husband is a camera operator in the motion picture industry and a member of the appropriate union. He has many employers in the course of a year; most treat him as a W-2 employee, but a few pay him as an independent contractor and issue a Form 1099-MISC. Yet employee vs contractor is not the issue here.
For the year in question, which was 2008, the husband had made a small contribution, less than the maximum, to a traditional IRA account for himself, and claimed a tax deduction for the full amount of the contribution on the couple’s joint Form 1040.
The IRS CP-2000 notice indicated that the husband could not deduct the IRA contribution because of the limitations that result from coverage by an employer retirement plan during the year. The AGI reported on the couple’s 2008 Form 1040 was well over the income threshold for an “active participant” employee. The IRS removed the deduction and recalculated the tax liability accordingly, adding penalty and interest.
However, while the wife was, the husband was not an active participant in an “employer” plan (note the important word here is employer) at any time during 2008. This is true even though when he retires the husband will be able to collect on a pension.
As a union member the husband pays dues to the union. The union is not his employer. The various movie production companies that hire him during the year, generally for short-term projects, are his employers. These various employers make contributions based on earnings to the Motion Picture Industry retirement plan. But they do not make contributions for the husband to any plans that they themselves maintain for their employees.
The husband is not permitted to make any contributions to his union retirement plan.
The union retirement plan is not an “employer plan”. Therefore the husband is not an active participant in an employer plan, even though employer contributions are credited to his “account” during the year.
For tax year 2008, if only one spouse is an active participant in an “employer plan”, the other spouse, whether working or nonworking, can deduct the entire contribution to his/her IRA up to the statutory maximum if the couple’s combined modified Adjusted Gross Income is $159,000 or less. The MAGI on the joint 2008 Form 1040 for my clients was less than $140,000.
The husband is entitled to a full deduction for his IRA contribution.
We looked back at the W-2s issued to the husband for 2008 and found that one of the employees had checked the box to give the impression that the husband was a participant in that employer’s retirement plan. This is apparently what triggered the IRS CP-2000 notice. This was wrong.
Perhaps the employer, or his bookkeeper or accountant, thought that because the employer made contributions to the union retirement plan the husband was an “active participant”. But whoever so thought was wrong.
So if you are a union member in a situation similar to that of my client, and one or more of your 2010 W-2s have the Retirement Plan box checked, contact the employer(s) immediately and have him issue to you, and the Social Security Administration, a corrected Form W-2!
Have any of my fellow tax pros out there come across a similar situation, or disagree with me on this issue? I welcome your comments.
TTFN
The client in this situation is a married couple. The wife is employed full-time, earning a substantial salary, and is an active participant in her employer's pension plan. The husband is a camera operator in the motion picture industry and a member of the appropriate union. He has many employers in the course of a year; most treat him as a W-2 employee, but a few pay him as an independent contractor and issue a Form 1099-MISC. Yet employee vs contractor is not the issue here.
For the year in question, which was 2008, the husband had made a small contribution, less than the maximum, to a traditional IRA account for himself, and claimed a tax deduction for the full amount of the contribution on the couple’s joint Form 1040.
The IRS CP-2000 notice indicated that the husband could not deduct the IRA contribution because of the limitations that result from coverage by an employer retirement plan during the year. The AGI reported on the couple’s 2008 Form 1040 was well over the income threshold for an “active participant” employee. The IRS removed the deduction and recalculated the tax liability accordingly, adding penalty and interest.
However, while the wife was, the husband was not an active participant in an “employer” plan (note the important word here is employer) at any time during 2008. This is true even though when he retires the husband will be able to collect on a pension.
As a union member the husband pays dues to the union. The union is not his employer. The various movie production companies that hire him during the year, generally for short-term projects, are his employers. These various employers make contributions based on earnings to the Motion Picture Industry retirement plan. But they do not make contributions for the husband to any plans that they themselves maintain for their employees.
The husband is not permitted to make any contributions to his union retirement plan.
The union retirement plan is not an “employer plan”. Therefore the husband is not an active participant in an employer plan, even though employer contributions are credited to his “account” during the year.
For tax year 2008, if only one spouse is an active participant in an “employer plan”, the other spouse, whether working or nonworking, can deduct the entire contribution to his/her IRA up to the statutory maximum if the couple’s combined modified Adjusted Gross Income is $159,000 or less. The MAGI on the joint 2008 Form 1040 for my clients was less than $140,000.
The husband is entitled to a full deduction for his IRA contribution.
We looked back at the W-2s issued to the husband for 2008 and found that one of the employees had checked the box to give the impression that the husband was a participant in that employer’s retirement plan. This is apparently what triggered the IRS CP-2000 notice. This was wrong.
Perhaps the employer, or his bookkeeper or accountant, thought that because the employer made contributions to the union retirement plan the husband was an “active participant”. But whoever so thought was wrong.
So if you are a union member in a situation similar to that of my client, and one or more of your 2010 W-2s have the Retirement Plan box checked, contact the employer(s) immediately and have him issue to you, and the Social Security Administration, a corrected Form W-2!
Have any of my fellow tax pros out there come across a similar situation, or disagree with me on this issue? I welcome your comments.
TTFN
4 comments:
I believe you are wrong. IRC 219(g)(5) lists several categories of people who are considered "active participants", among them those who are an active participant in "a plan described in section 401 (a)". Looking at the Motion Picture Industry Pension Plan, it appears to be structured so as to fall under IRC 401(a).
Anthony-
No rest for the weary!
Thank you for your comment. I will look into the matter when I "come up for air".
In the meantime, does anyone else out there have any comments on what Anthony has suggested? Is he correct?
I will certainly let you know how the IRS responds to my assertions.
TWTP
Anthony-
I have done a quick search of 401(a) plans.
Everything I can find about a 401(a) plan describes it as an “employer plan” – one that is set up by an employer for its employees. It is also discussed in terms of being specific to public schools, and being set up by the school district “employer” and not the teacher’s union.
And all discussion of IRS deduction limits talk of “employer plans” –
“the deduction you can take for contributions made to your traditional IRA whether you or your spouse was covered for any part of the year by an employer retirement plan”
I stand by what I have said – that the Motion Picture Industry is not an “employer plan”.
I welcome anyone else’s input on this issue.
TWTP
I agree union-sponsored plans are not "employer plans" as the union is not the employer.
Although I could not find a citation directly on point for this issue I believe it may be gleened from Reg. 1.408-2(c)(1). This regulation is referring to whether a trust is for the exclusive benefit of employees. Under this regulation:
"A trust created or organized in the United States (as defined in section 7701(a)(9)) by an employer for the exclusive benefit of his employees or their beneficiaries, or by an association of employees for the exclusive benefit of its members or their beneficiaries, is treated as an individual retirement account if the requirements of paragraphs (c)(2) and (c)(3) of this section are satisfied under the written governing instrument creating the trust. A trust described in the preceding sentence is for the exclusive benefit of employees or members even though it may maintain an account for former employees or members and employees who are temporarily on leave."
Because the regulation specifically refers to employers immediately before referring to unions as "an association of employees", I presume these are two separate groups. I know this isn't the best citation but it was the best I could find.
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