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414(h) plan

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#1 Dick Lane

Dick Lane

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Posted 21 September 1999 - 12:30 AM

I would like to understand what a 414(h) plan is. I see it shown on an employee's W-2 form. In box 14d, the label is N.Y.C.E.R.S. 414(h). The amount show in the box has been deferred, like the amount in box 13e, for a 403(B) plan. The employer is New York City Health & Hospitals Corporation

#2 Carol V. Calhoun

Carol V. Calhoun

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Posted 22 September 1999 - 10:01 AM

Short version: The 414(h) contribution is the mandatory contribution to N.C.E.R.S. which is taken out of the employee's paycheck, but which is not included in his or her wages as shown on the W-2, because it is not immediately taxable. The box 14d notation is informational only; the amount does not have to be reported on this year's tax return.

Long version: Hmm, okay, history lesson. I.R.C. 414(h) was a Congressional response to a well publicized case in which an individual argued that because he never received, and never had the right to receive, the amounts taken from his paycheck to make mandatory contributions to his retirement plan, he was not taxable on such contributions. To avert this sort of argument, Congress passed I.R.C. 414(h), which says in general that a mandatory contributions is treated as an employee contribution (and therefore as taxable to the employee) if the plan refers to it as an employee contribution.

However, an exception was carved out for governmental plans. The reason was that it was quite common for a governmental employer (e.g., a municipality) to contribute to a plan (e.g., a state retirement system) which it has no power to amend. In many instances, the state retirement system might call for mandatory employee contributions. However, as a result of collective bargaining or otherwise, the employer might agree to make the contributions otherwise required of employees out of its own pocket, rather than deducting them from employees' wages. The general rule of I.R.C. 414(h) would have treated the contributions in such a situation as being employee contributions, and therefore as taxable to the employee, even though the employer was in fact making them. For this reason, Congress included I.R.C. 414(h)(2), which says that if a governmental employer picks up contributions which are designated by a plan as employee contributions, and if the employee has no choice about whether to make such contributions or to get the cash instead, the contributions will be treated as employer contributions (i.e. not taxable when made to the plan, but only when paid out in the form of benefits).

In a series of first revenue rulings and then private letter rulings beginning in the early 1980s, the IRS has held that I.R.C. 414(h)(2) applies to a broad range of arrangements that most people initially would not have thought of pickup arrangements. (No, I'm not going to cite all the citations or the details; I'm saving that for the really long version.) In particular, so-called pickups will exist if the employer says they exist, and if the contributions are mandatory, even if they are in fact taken out of the employees' paychecks.

In the case you reference, N.Y.C.E.R.S. requires mandatory employee contributions. However, New York City has adopted the appropriate resolutions to treat the contributions as picked up within the meaning of I.R.C. 414(h)(2), so the amount of the contributions is subtracted from the employee's pay in calculating Form W-2 income. However, the IRS requires that they nevertheless be disclosed in box 14d of the Form W-2, primarily so that the IRS will have a way to do an audit and make sure the contributions are appropriate and are being treated consistently on pay-in and pay-out.
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