Section 414(w) Withdrawals: How Do They Work?
For those automatically enrolled in a retirement plan, learn how you can reverse initial contributions penalty-free and understand the key considerations.
Many employers now use automatic enrollment to help their workers save for retirement, where a percentage of an employee’s pay is automatically deposited into a 401(k) or similar account. Some employees may find themselves enrolled before they are ready to contribute. For these situations, Internal Revenue Code Section 414(w) provides a remedy known as a permissible withdrawal. This provision acts as an opt-out mechanism, giving employees a short window to withdraw their initial contributions without facing the usual penalties for early distributions.
Eligibility for a Permissible Withdrawal
The ability to make a permissible withdrawal is not available in all retirement plans. This option is exclusively tied to plans that include a feature known as an Eligible Automatic Contribution Arrangement, or EACA. An EACA is a specific type of automatic enrollment plan that must follow certain uniform rules set by the IRS.
A plan with an EACA may permit employees to withdraw their automatic contributions, but it is not required to offer this option. The plan documents will specify if this feature is available. The first step for any employee is to confirm with their human resources department or plan administrator whether their specific retirement plan includes both an EACA and the permissible withdrawal provision.
The most defining requirement for a permissible withdrawal is the strict timing. An employee who wishes to make this election must do so within a specific window, which cannot exceed 90 days. This 90-day period begins on the date of the first automatic contribution made under the arrangement.
Some plans may establish a shorter period for this election, such as 30 or 60 days, but it cannot be less than 30 days. The plan’s official documents will outline the exact timeframe an employee has to act.
When an employee successfully makes a permissible withdrawal, the amount they receive includes the total of their automatic contributions plus any investment earnings those contributions have generated. If the investments lost value, the withdrawn amount would be the contributions minus any losses. The plan is permitted to charge a distribution fee, but it cannot be higher than the fee for any other type of cash distribution from the plan.
If the employer provided a matching contribution based on the employee’s automatic deferrals, that match must be forfeited. The employee is not entitled to keep any employer funds associated with the contributions they are withdrawing.
Tax Treatment of the Withdrawal
The entire amount of the distribution, which includes both the original pre-tax contributions and any earnings, is considered taxable income. This income must be reported on the employee’s federal tax return for the year in which the distribution is received. For example, if an employee makes the withdrawal election in December 2024 but receives the funds in January 2025, the income is reported on their 2025 tax return.
The primary financial advantage of this provision is the waiver of the 10% early withdrawal penalty. Distributions from a retirement plan before age 59½ are typically subject to this additional tax under Section 72(t), but a timely permissible withdrawal is explicitly exempt. This exemption distinguishes a permissible withdrawal from a standard hardship withdrawal, which would likely incur the penalty.
The transaction is officially documented for tax purposes on Form 1099-R, which the plan administrator sends to both the employee and the IRS. When reviewing this form, the employee should look at Box 7, which contains the distribution code. For a permissible withdrawal, this box should contain the code ‘2’, indicating that an exception to the early distribution penalty applies. If the withdrawal was from a designated Roth account, Box 7 would show codes ‘B’ and ‘2’.
Requesting the Withdrawal
An employee should start by reaching out to their employer’s human resources department or the designated retirement plan administrator. The plan’s Summary Plan Description or the initial enrollment notice will usually provide the specific contact information for making such elections.
When making the request, the employee will need to provide identifying information to the plan administrator. This generally includes their full name, Social Security number, and plan account number. The employee must state their intent to elect a permissible withdrawal, and some plan administrators may have a specific form that needs to be completed for this purpose.
The plan administrator is required to process the distribution according to its standard procedures for other cash payouts. While there is no federally mandated timeline for payment, most administrators will process the request within a few weeks. The funds are typically sent via check or direct deposit, depending on the options available under the plan.