This error occurs because the owner of the Account of one of the Contacts being merged is Inactive.  To fix this, do the following:
  1. Look at the Account record for each Contact involved in the merge.
  2. Check the Account Owner on the Account record and see if they are Inactive (it will usually list this if you hover over the name, otherwise click the name to bring up the Owner's record).
  3. If the Account Owner is inactive, change the Account Owner to an administrator that is Active.
  4. Once this has been verified for each Contact, merge the records again.