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We only retire players from the database if they're actually retired. If they're just playing in a league that's very low-level, they may start the game as free agents, but they're still active.
Promotion and relegation is enabled for the leagues that use it, yes.
Historical players are active in the years they were actually active as professionals, including in leagues outside the NHL, even if the game option to retire them when they actually retired is used. With that option on, Tomas Jonsson remains in historical games until 1998, Jorgen Jonsson until 2008, long after they left the NHL.
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