skip navigation
Search Help
Navigation Help

Tax Map Index

Tax Topic Index

Affordable Care Act
Tax Topic Index

Exempt Organization
Tax Topic Index

Tax Topics

About Tax Map Website
Rev. date: 11/30/2016

401(k) Plans

Tax Topic 424
A 401(k) plan is a qualified deferred compensation plan. If you're eligible under the plan, you generally can elect to have your employer contribute a portion of your compensation to the plan on a pretax basis. Generally, your deferred compensation (commonly referred to as elective contributions) isn't subject to income tax withholding at the time of deferral, and you don't report it as wages on Form 1040, U.S. Individual Income Tax Return, since it isn't included in box 1 wages on your Form W-2, Wage and Tax Statement. However, it's 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. Some plans also allow you to elect to make your elective contributions on an after-tax basis as designated Roth contributions.


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.


The plan will specify the form of distribution. Some distributions from a 401(k) plan may qualify for lump-sum distribution treatment or rollover treatment as long as they meet the respective requirements. For more information, refer to Tax Topic 412, Lump-Sum Distributions, and Tax Topic 413, Rollovers from Retirement Plans.
Hardship Withdrawals - 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 don't include any income earned on the deferred amounts. Hardship distributions aren't treated as eligible rollover distributions.
Additional 10% Tax - Distributions received before age 59½ are subject to an additional 10% tax unless an exception applies. Qualification for a hardship distribution isn't an exception to the additional 10% tax. For more information about the treatment of retirement plan distributions, refer to Publication 575, Pension and Annuity Income.