Tax Withholding and Reporting for a 401(a)

At tax time, transfer the amount in Box 1 of your W-2 to the gross wages line of your Form 1040.

At tax time, transfer the amount in Box 1 of your W-2 to the gross wages line of your Form 1040.

A 401(a) plan has lots of benefits. You get to choose from many investment options, assign beneficiaries to your account and select the payout option that’s right for you. The plan has upsides for your employer as well. It gives your employer greater flexibility when establishing contributions and incentive programs to retain quality workers. This type of plan is often used by public or government entities, which might make your participation mandatory. Your employer must follow specific tax rules when making and reporting your payroll deductions.

General Criteria

Depending on the program, you, your employer or both of you may put money into the plan. If you’re allowed to kick in an amount, your employer decides whether your participation is mandatory or voluntary. It also decides whether your payments should be pretax or after-tax. Pretax means you don’t pay federal, and in most cases, state income tax on your payroll deductions. Your employer must withhold Medicare and Social Security taxes.

After-Tax and Pretax

After-tax means your employer withholds income taxes plus Social Security and Medicare taxes from your payroll deductions. Unlike the pretax option, after-tax doesn’t give you tax savings when your employer takes the money out of your paychecks. But if you make a qualified withdrawal, you don’t pay income taxes on what you take out. When you fund your account with pretax money, you must pay income taxes on your withdrawal. If you pull your money out of your 401(a) plan before age 59 ½, you might get hit with an early withdrawal penalty of 10 percent.

W-2 Reporting

Your employer doesn’t put your pretax payments in your federal taxable wages in Box 1 of your annual W-2 form. Your after-tax payments, however, must go in Box 1. If your employer took out state income tax, your state wages in Box 16 must show your contributions. If the employer didn’t withhold state income tax, then Box 16 shouldn’t include your 401(a) deductions. Because you paid Medicare and Social Security taxes, boxes 3 and 5, which stand for your Medicare and Social Security wages, should show your payments. Your employer must also put an “X” in Box 13, which says “Retirement Plan,” so the Internal Revenue Service knows you participated in a 401(a) plan.

W-2 Reconciliation

If your employer wants, it can put employer or employee contributions, or both, in Box 14 of your W-2. This data is for your information. You can use it to reconcile the amounts in Boxes 1, 3 and 5 with your last pay stub for the year. For instance, if you paid with pretax money, add the amount in Box 1 to the employee amount in Box 14. This should equal the total gross salary on your last pay stub for the year.

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About the Author

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.

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