Why isn't my Traditional 401k contribution deductable, since neither my wife nor I was covered by an employer Retirement Plan.

[david-j-lochner]

It's complicated.  I terminated my employment on 12/31/17 and was therefore not covered by a Retirement Plan in 2018.  However, due to a stub payroll cycle, my ex-employer withheld and contributed one last 401k contribution in the first week of January 2018.  So, I was not covered, yet the stub payroll shows a 401k contribution which shows up on my W-2.  The fact is that I was not covered in a Retirement Plan in 2018 because I was not an employee.  My AGI well-exceeds the income limits if I am viewed to be under a plan for some reason.

What I would like to do is contribute the difference between the maximum allowed and the stub 401k payment, and have my wife contribute the maximum, and have the sum of the two contribution be fully deductible--given that I was not covered by a Plan and therefore should have not income test.

[MichaelL1]

If you were covered for one day in 2018 that is what the IRS uses.  It goes by when you are paid, not when the work was actually done.

I fully understand what you are saying.

You would have to convince the employer to issue a new W-2 (corrected one) and have the retirement box not checked on it otherwise IRS will deny the IRA contribution.

"my ex-employer withheld and contributed one last 401k contribution in the first week of January 2018"

[david-j-lochner]

My ex-employer has agreed to issue a revised W-2 without the Retirement Plan box checked.  I assume that the stub 401k contribution will still be on the W-2.  Does that change your advice?  Thanks for your help.

[MichaelL1]

This is from the IRS web site:

You’re covered by an employer retirement plan for a tax year if your employer (or your spouse’s employer) has a:

    Defined contribution plan (profit-sharing, 401(k), stock bonus and money purchase pension plan) and any contributions or forfeitures were allocated to your account for the plan year ending with or within the tax year;
     
    IRA-based plan (SEP, SARSEP or SIMPLE IRA plan) and you had an amount contributed to your IRA for the plan year that ends with or within the tax year; or
     
    Defined benefit plan (pension plan that pays a retirement benefit spelled out in the plan) and you are eligible to participate for the plan year ending with or within the tax year.

Box 13 on the Form W-2 you receive from your employer should contain a check in the “Retirement plan” box if you are covered. If you are still not certain, check with your (or your spouse’s) employer.

[MichaelL1]

I am going to see if the retirement expert @dmertz will take a look at this.

As with the 401K contribution still on the W-2, I think you are still covered in the eyes of IRS.

[dmertz]

Terminating your employment at the end of 2017 does not necessarily make you not covered by that employer's retirement plan for 2018.  If the employer's plan uses a fiscal year rather than a calendar year, since you made contributions for December 2017, you are covered for 2018.  Your W-2 should reflect that by having box 13 Retirement plan marked; the IRS goes by the marking of this box.  However, an elective deferral from your 2017 pay should have been reflected on your 2017 W-2, not on your 2018 W-2, so perhaps your employer has erred by showing this income and elective deferral on a 2018 W-2.

If the 401(k) plan uses a calendar year, you are not covered for 2018 and probably should not have received any W-2 for 2018.  If the 401(k) plan uses a fiscal year rather than a calendar year, your 2018 W-2 probably should not show any dollar amounts unless you received some severance pay, but should have box 13 Retirement plan marked.  I doubt that a 401(k) elective deferral would be permitted from severance pay, so it seems that there should be no elective deferral amount shown in box 12 of your W-2.

[user17736706288]

IRS publication "General Instructions for Forms W-2 and W-3” states that Box 13 should be checked "if the employee was an active participant..." If the person's employment was terminated on December 31 of the prior year, then he or she is not an "employee" and Box 13 should not be checked on the W-2 for the following year.

[dmertz]

If the plan uses a calendar year, you are correct that separating from service by the end of 2024 would mean that you are not covered for 2025 because you are not eligible for additions for 2025 due to no longer being an employee.  However if the plan uses a fiscal  year, just because you were not an employee on December 31, 2024 does not necessarily mean that you are not an active participant for 2025.  It depends on which month the plan's fiscal year ends and when in 2024 contributions were made.  If the employer's plan uses a fiscal year instead of a calendar year and the employer or, while still employed, the employee made contributions for the plan year that ends in the year after the year that the employee separated from service, the individual is an active participant.  The marking of box 13 Retirement plan on a W-2 issued for the year following the year the employee separated from service would reflect that, and that's what the IRS goes by.

For example, if the plan uses a fiscal year ending on January 31, an employee who made an elective deferral in February 2024 would be considered to be an active participant for 2025.  By itself, that contribution in February 2024 would not make them covered for 2024 because it was made for the plan year that ends in 2025.