What Is 414(h) on My W-2 and What Does It Mean?

The W-2 form reports yearly wages and taxes withheld. While often straightforward, certain codes on this form can lead to confusion. This article clarifies the meaning of “414(h)” when it appears on a W-2, helping individuals understand its implications for their earnings and tax obligations.

Understanding IRS Section 414(h)

IRS Section 414(h) addresses mandatory contributions made by public sector employees to their retirement plans. This provision allows these contributions to be treated as “employer pick-up” contributions for tax purposes. These arrangements are common for employees of state and local governments, as well as public education institutions.

This designation enables employee-funded contributions to be made on a pre-tax basis for federal income tax. The amount contributed under a 414(h) arrangement is excluded from the employee’s gross income for the current tax year. The arrangement effectively reduces the employee’s taxable income, leading to a lower federal income tax liability.

Contributions under Section 414(h) are mandatory payments to a qualified governmental plan, distinguishing them from voluntary employee deferrals to other retirement accounts like a 401(k) or 403(b). While legally treated as employer contributions under this section, the funds are sourced from the employee’s salary through a reduction in their pay. This “pick-up” mechanism shifts the tax burden from the employee to the employer for reporting purposes, even though the employee’s compensation is reduced.

Identifying 414(h) on Your W-2

Contributions made under IRS Section 414(h) are most commonly reported in Box 14 of the W-2 form, which is designated for “Other information.” Employers use this box to provide additional details relevant to the employee’s compensation or benefits that do not fit into other specific boxes.

Common labels or codes that might indicate 414(h) contributions include:
414(h)
414H
Mandatory Retirement
Retirement Pick-Up
Employer Pick-Up
IRC 414(h)
The numerical amount listed next to these labels represents the total sum of mandatory pre-tax retirement contributions made during the tax year under the 414(h) arrangement.

This amount in Box 14 has already been subtracted from the figure reported in Box 1, labeled “Wages, tips, other compensation.” This reduction in Box 1 directly reflects the pre-tax nature of 414(h) contributions for federal income tax purposes. Consequently, your federal taxable income is lower by the amount of these contributions.

While 414(h) contributions reduce the amount in Box 1, they generally do not reduce the wages reported in Box 3, “Social Security wages,” or Box 5, “Medicare wages.” This distinction is a significant aspect of their tax treatment. Recognizing these entries helps in understanding how your total compensation is reported and taxed.

Tax Implications of 414(h) Contributions

The tax treatment of 414(h) contributions has distinct implications across various tax categories. For federal income tax purposes, the amount reported as 414(h) on your W-2 is excluded from your federal taxable income. This means you do not pay federal income tax on this portion of your earnings in the current year, which effectively lowers your overall federal income tax liability. This pre-tax treatment provides an immediate tax benefit by reducing the income subject to federal taxation.

Regarding state income tax, the treatment of 414(h) contributions can vary. Many states align with federal guidelines, allowing these contributions to be excluded from state taxable income. However, some states have different rules, requiring these contributions to be added back for state tax calculations, meaning they are not pre-tax for state income tax purposes. Consult your specific state’s tax laws or a qualified tax professional to understand the precise treatment.

Local income taxes often follow the state’s lead regarding the taxability of 414(h) contributions. However, the exact treatment can vary depending on the specific municipality or local taxing authority. Taxpayers subject to local income taxes should verify how these contributions are handled in their particular jurisdiction.

A significant aspect of 414(h) contributions is their treatment for Social Security and Medicare (FICA) taxes. Unlike some other pre-tax retirement contributions, such as those to a 401(k) or 403(b) plan, 414(h) contributions do not reduce the wages subject to Social Security (Box 3) and Medicare (Box 5) taxes. This means that employees still pay FICA taxes on these contributions, as they are considered part of the FICA wage base. The reason for this distinction lies in the specific statutory definitions of wages for FICA purposes, which generally include these types of “employer pick-up” contributions.

While 414(h) contributions offer a current-year tax deferral, they will be subject to income tax upon withdrawal in retirement. This is consistent with the tax treatment of other pre-tax retirement accounts, where taxes are deferred until the funds are distributed in the future. Understanding these various tax implications is essential for accurate tax planning and compliance.