What Is 414h2 on a W-2 and How Does It Affect Taxes?

The W-2 form details an individual’s wages and taxes withheld. It often includes unfamiliar codes. This article clarifies the meaning and tax implications of “414(h)(2)” on a W-2, aiding accurate tax preparation and understanding of certain retirement contributions.

Decoding 414(h)(2) Contributions

The code 414(h)(2) on a W-2 refers to “pick-up” contributions made to a governmental pension plan. These plans are typically offered to employees of state or local government entities, such as public school teachers or municipal workers. Under Internal Revenue Code Section 414, what would otherwise be considered mandatory employee contributions are formally designated and paid by the employer on behalf of the employee.

This re-characterization means that for federal income tax purposes, these amounts are treated as employer contributions. This allows the employee to defer paying federal income tax on the contributed amount until retirement. The presence of 414(h)(2) on a W-2, often found in Box 14, indicates that these specific contributions have been made and are being reported according to tax regulations.

The “pick-up” mechanism is a formal accounting treatment rather than an additional payment by the employer on top of the employee’s salary. While the funds originate from the employee’s total compensation, the employer’s formal action designates them as employer contributions. This arrangement is generally non-elective for the employee, meaning they cannot choose to receive the contributed amount as cash or opt out of the pick-up treatment.

Tax Treatment of 414(h)(2) Amounts

The tax implications of 414(h)(2) contributions vary depending on the type of tax. For federal income tax purposes, these amounts are generally excluded from the employee’s gross income. This exclusion is why the amount reported in Box 1 (Wages) of the W-2 is typically lower than the amounts in Box 3 (Social Security Wages) or Box 5 (Medicare Wages).

Despite being excluded from federal income tax, these “picked-up” contributions are subject to Social Security and Medicare (FICA) taxes. Consequently, the amounts reported in Box 3 and Box 5 of the W-2 will include the 414(h)(2) contributions.

The tax treatment for state and local income tax purposes can vary across different jurisdictions. Some states may follow the federal exclusion, treating these contributions as pre-tax. Other states may require these contributions to be included in taxable income, necessitating an adjustment on the state tax return. It is advisable for individuals to consult their specific state’s tax laws or guidance to understand how 414(h)(2) contributions are handled at the state and local levels.

Completing Your Tax Return with 414(h)(2) Information

When preparing a federal tax return, the information related to 414(h)(2) contributions generally does not require additional adjustments if the W-2 is correctly prepared. The employer should have already accounted for the federal income tax exclusion in Box 1 of your W-2. Therefore, the amounts displayed in Box 1, Box 3, and Box 5 already reflect the proper federal tax treatment of these contributions.

Tax preparation software typically handles Box 14 entries, including those for 414(h)(2), without requiring specific user input beyond entering the W-2 data. The software is designed to interpret these codes and apply the correct tax rules automatically.

For state tax returns, a specific adjustment might be necessary if the state’s tax laws differ from federal treatment regarding 414(h)(2) contributions. If a state taxes these amounts while the federal government does not, individuals may need to add back the 414(h)(2) amount to their state taxable income. Instructions for such adjustments are typically found within the state’s income tax form instructions or on the state tax agency’s official website.