If you've worked and earned wages during the past year, then you'll receive a Form W-2, Wage and Tax Statement, from your employer by the end of January. This form reports your total earnings to the IRS as well as the amount of federal and state taxes withheld from your pay. Box 12 indicates contribution to a qualified retirement plan. That amount is important for tax purposes, as is the letter code that indicates the type of contributions made.
A mandatory contribution is one that the employer must make by law. This can be a payment to a state retirement pension system, for example. If the contribution is made "pre-tax," then it's not included in your taxable wages, which appears on Box 1 of the W-2. It would be included in Social Security wages (Box 3), however, meaning the amounts in Box 1 and Box 3 will be different. The difference represents the amount of the mandatory contribution.
In IRS lingo, an "elective deferral" is a contribution made voluntarily by an employee to a qualified employer-sponsored retirement account, such as a 401(k). The term "deferral" refers to the tax treatment of these contributions, on which tax is deferred until distributions begin in retirement. These voluntary payments into a savings plan go in Box 12 of the W-2.
A "non-elective contribution" is one that an employer is required to make on behalf of the employee or one that an employee must make by the terms of the account. These mandatory payments appear in Box 14 of the same form. A state disability insurance contribution would belong in this category, as would a contribution to a 414-H plan for government employees, a Section 125 "cafeteria" plan that offers a menu of health insurance and other benefits or contributions to a railroad retirement benefit plan.
Social Security Earnings
It's important to remember that Social Security and Medicare taxes are still due on employer contributions even if that money is not reported as part of your taxable earnings. This is the reason for Box 3 on Form W-2 showing "Social Security Wages." When you pay these taxes, you contribute to retirement and disability trust funds administered by Social Security and collect work credits toward your own Social Security eligibility. If you have a 401(k) or other retirement plan at work, it's vital to check the W-2 to ensure that your employer has correctly recorded both taxable and Social Security earnings.
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