A 401(k) plan is a qualified deferred compensation plan. You can elect to have your employer contribute a portion of your cash wages to the plan on a pretax basis. Generally, these deferred wages (commonly referred to as elective contributions) are not subject to income tax withholding at the time of deferral, and you do not report them on Form 1040 (PDF), U.S. Individual Income Tax Return, since they were not included in the taxable wages on your Form W-2 (PDF), Wage and Tax Statement. However, they are included as wages subject to withholding for Social Security and Medicare taxes. In addition, your employer must report the elective contributions as wages subject to federal unemployment taxes.
The Internal Revenue Code limits the amount that an employee may elect to defer in a 401(k) plan. Your elective contributions may also be limited based on the terms of your 401(k) plan and are reported as an information item on line 12 of your Form W-2. Refer to Publication 525, Taxable and Nontaxable Income, for more information about elective contributions. Employers should refer to Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans), for information about setting up and maintaining retirement plans for employees, including 401(k) plans.
Distributions from a 401(k) plan may qualify for optional lump-sum distribution treatment or rollover treatment as long as they meet the respective requirements. For more information, refer to Topic 412, Lump-Sum Distributions, and Topic 413, Rollovers from Retirement Plans.
Many 401(k) plans allow employees to make a hardship withdrawal because of immediate and heavy financial needs. Generally, hardship distributions from a 401(k) plan are limited to the amount of the employees' elective contributions only, and do not include any income earned on the deferred amounts. Hardship distributions are not treated as eligible rollover distributions.
Distributions received before age 59½ are subject to a 10% additional tax unless an exception applies. Qualification for a hardship distribution is not an exception to the 10% additional tax. For more information about the treatment of retirement plan distributions, refer to Publication 575, Pension and Annuity Income.
Page Last Reviewed or Updated: May 12, 2015