Your participation in a governmental 414(h) plan is mandatory, and both you and your employer must fund your account. Section 414(h) of the Internal Revenue Code lets your employer “pick up” your mandatory contributions, enabling you to make pretax payments. Your pretax deductions give you a tax break on your federal income tax withholding; you cannot claim them on your federal tax return.
TL;DR (Too Long; Didn't Read)
You cannot claim a 414(h) retirement plan on your federal taxes.
Federal Income Tax Wages
Your employer not taking federal income tax out of your 414(h) contributions causes a decrease in your taxable wages and your federal income tax withholding. When completing your annual W-2, your employer does not include your, or its own, contributions in Box 1, which represents your federal taxable gross wages. At tax time, your federal taxable gross wages goes on the “Wages, salaries, tips” line of your Form 1040. This amount is already reduced by your pretax 414(h) contributions, so you cannot claim it as a deduction.
Social Security and Medicare Wages
You don’t get a tax break on your 414(h) contributions for Social Security and Medicare taxes. Your employer must add your 414(h) contributions to your wages for the pay period and then withhold those two taxes. On your W-2, your employer includes your 414(h) deductions in your Social Security wages, which go in Box 3, and in your Medicare wages, which go in Box 5. For informational purposes, your employer may state your annual 414(h) contributions, including deductions against your account, in Box 14 of your W-2. Your employer does not have to supply this data.
Understanding State Policies
State tax laws on 414(h) plans vary. If the state follows federal treatment, your employer does not take state income tax out of your contributions and you cannot claim a deduction on your state tax return. If the state regards 414(h) contributions as taxable, your employer must deduct the tax from your contributions. For instance, employers in New York must withhold state and local taxes from 414(h) funds. At tax time, the taxpayer states her contribution amount as an addition instead of a subtraction to her wages on her state tax form.
Exploring Funds Withdrawal
You may withdraw funds from your 414(h) account if you leave your current employer or retire. You must pay federal income tax on your withdrawal, but not Social Security or Medicare taxes. If the state regards 414(h) funds as taxable at the time of payroll deduction, you should not pay any state income tax on your withdrawal.
Grace Ferguson has been writing professionally since 2009. With 10 years of experience in employee benefits and payroll administration, Ferguson has written extensively on topics relating to employment and finance. A research writer as well, she has been published in The Sage Encyclopedia and Mission Bell Media.