What Is IRC 414(h) on a W2 Statement?

IRC Section 414(h) is a provision within the Internal Revenue Code that impacts how certain retirement contributions are treated for tax purposes, particularly for public employees. Individuals may encounter this specific designation on their annual Wage and Tax Statement, commonly known as a W2 form. Understanding this section is important for those contributing to governmental retirement plans, as it affects their taxable income and overall financial picture.

What Section 414(h) Means

Internal Revenue Code Section 414(h) allows mandatory employee contributions to governmental retirement plans to be treated as if they were “picked up” by the employer. This means that while the contributions are made by the employee, they are reclassified as employer contributions for federal income tax purposes. This reclassification leads to a reduction in the employee’s gross income for the year, effectively making these contributions pre-tax for federal income tax calculations.

This provision applies to employees of federal, state, or local government entities who participate in their respective retirement systems. To qualify for this “pick-up” treatment, the employer must formally designate the employee contributions as employer contributions. Additionally, employees typically cannot have the option to receive these amounts directly as cash or to opt out of the contribution, ensuring they are irrevocably directed to the retirement plan.

It is important to note that while these “picked up” contributions are excluded from federal income tax, they remain subject to Social Security and Medicare taxes, often referred to as FICA taxes. This distinction is a key characteristic of 414(h) plans, setting them apart from some other pre-tax retirement vehicles where FICA taxes might also be avoided.

How It Appears on Your W2

When contributions are made under IRC Section 414(h), their appearance on your W2 form reflects their specific tax treatment. The amount of these contributions is typically found in Box 12 of your W2. While various codes can appear in Box 12, contributions under Section 414(h) are often identified with code “G.”

The inclusion of these contributions impacts several other boxes on the W2. In Box 1, which reports “Wages, tips, other compensation,” the 414(h) amount is excluded. This exclusion directly reflects its pre-tax status for federal income tax purposes, meaning your Box 1 wages are lower by the amount of your 414(h) contributions.

However, the 414(h) contributions are included in Box 3, “Social Security wages,” and Box 5, “Medicare wages.” This indicates that these contributions remain subject to Social Security and Medicare taxes.

Tax Implications and Benefits

The primary tax implication and benefit of IRC Section 414(h) contributions is the reduction in your current taxable income for federal income tax purposes. By excluding the “picked up” contributions from your gross income, your overall tax liability for the year is lowered. This can result in a smaller tax bill or a larger tax refund, providing an immediate financial advantage.

While the federal income tax benefit is consistent, the treatment of these contributions for state income tax purposes can vary. In many states, the same pre-tax treatment applies, further reducing state income tax obligations. However, some states may require these contributions to be added back to your income for state tax calculations, so it is important to check specific state tax laws.

Since FICA taxes are still paid on these amounts, the contributions generally count towards your creditable earnings for future Social Security benefits and Medicare eligibility. This means that contributing to a 414(h) plan typically does not negatively impact your future entitlement to these federal programs. The pre-tax nature of these contributions can also play a role in an individual’s broader financial planning. By reducing taxable income, it can potentially lower an individual’s adjusted gross income (AGI), which might affect eligibility for other tax credits or deductions.