Can the owner's sons be participants in the company's Profit Sharing and 401(k) plans, defer nothing and get a 0% contribution and still be allowed to contribute to their own individual IRAs?

The amount of any deductible IRA contributions is based on compensation for anyone who also is an active participants in a qualified plan, and a non-participant spouse can also contribute to a deductible IRA up to certain combined compensation limits. Also, non-deductible IRA contributions would be permitted. So, active participation does not automatically eliminate the ability of an individual to contribute to an IRA.

If you are asking whether electing not to defer into a 401(k) plan is considered actively participating in the plan for IRA purposes, the answer is No. Unless deferrals actually are made, or PS contributions or forfeitures are allocated, the individual is not actively participating.

So, if I understand your answer, Sieve, having a QACA plan does not put the EE in a Catch-22: either automatic deferrals (i.e., participating for purposes of the IRA deductible contribution rules) or affirmatively electing out (i.e., no participating merely by reason of making that affirmative election).

Any difference in the participating (or not) analysis if the affirmative election out is after automatic deferrals have been held out of that EE's paycheck and he elects to have all returned to his paychecks, in the retroactive election opportunity?

John --

In a QACA, affirmatively electing not to defer would prevent an employee from being treated as actively participating--as long as the QACA SH is not a NEC.

However, if you look at the 414(w) proposed regs, the 90-day return is treated as a withdrawal, so it seems to me that you would be an active particiapnt who simply chose to take a distribution of the deferrals and cease participation. In that case, you'd be an active participant.

So if a new EE has some auto deferral under the QACA and then opts to take it out during the 90-day window (needing it to cover some moving expenses, for example), even though the QACA SH is match rather than NEC, that EE might not be able to make a deductible IRA (or Roth IRA) contribution when doing his/her taxes for that year.

I don't take exception to the rules as you explain them, Sieve, just observing on the implications for an EE that opts out of the QACA.

I believe, based on the proposed regs, that the individual you describe will have to be considered actively participating in the QACA for purposes of determining any IRA contributions for that year. I don't find anything in the proposed regs--although perhaps there will be something in the final regs--that leads to a different result.

But isn't there an easy fix for that person to simply opt out BEFORE anything is withheld so that there is no withdrawal to muddy the issue?

Yes, if the new EE had the time to think it all through before his first payday, while trying to get used to the new job, get settled into the new house and everything.