The 414(h) entry in Box 14 of your W-2 is the total mandatory retirement contribution your state or local government employer deducted from your paychecks during the year and sent to your pension system. That amount was already excluded from your federal taxable wages in Box 1 before the form was printed, so you generally don’t need to do anything with it on your federal return. Your state return is often a different matter.
What the 414(h) Amount Represents
Box 14 is the W-2’s catch-all field, and the IRS instructions specifically direct employers to report Section 414(h)(2) contributions there.1Internal Revenue Service. General Instructions for Forms W-2 and W-3 (2026) Because Box 14 labels aren’t standardized, the same item can appear as “414H,” “414H RET,” “IRC 414(h),” “414H TIER 1,” or something similar. They all mean the same thing: mandatory employee contributions to a governmental defined benefit pension plan.
Most state and local pension systems require employees to contribute a set percentage of salary. Under Section 414(h)(2) of the Internal Revenue Code, when the employer formally “picks up” those mandatory contributions, they’re treated as employer contributions for federal income tax purposes even though the money comes out of your paycheck.2Office of the Law Revision Counsel. 26 U.S. Code 414 – Definitions and Special Rules The IRS requires the employer to take formal action designating the contributions as employer-paid and requires that employees cannot opt out or take the money as cash instead.3Internal Revenue Service. Employer Pick-Up Contributions to Benefit Plans
The practical result: the contribution is excluded from your gross income for federal purposes, and the wages in Box 1 already reflect that exclusion. If you compare the year-to-date gross on your final pay stub against Box 1, the 414(h) figure (along with any other pre-tax deductions like health premiums) accounts for the gap.
Why Box 1 Is Lower Than Boxes 3 and 5
The federal income tax exclusion does not carry over to Social Security and Medicare. Federal law treats picked-up amounts made through a salary reduction arrangement as wages for FICA purposes, and virtually every government pension funds mandatory contributions through payroll deduction.4Office of the Law Revision Counsel. 26 USC 3121 – Definitions
So Box 1 (federal taxable wages) will be lower than Box 3 (Social Security wages) and Box 5 (Medicare wages) by roughly the amount of your 414(h) contribution. That mismatch is correct. It also means your Social Security earnings record isn’t shrunk by your pension deductions, since future benefits are computed from the wages in Box 3.
What to Do on Your Federal Return
Nothing beyond reporting your Box 1 wages the normal way. The exclusion is already built into that figure, so there’s no separate deduction to claim, no adjustment on Form 1040, and no schedule to attach. For federal purposes, the Box 14 entry is informational.
Entering It in Tax Software
When you type in your W-2, most tax programs present a dropdown of Box 14 categories, and most don’t have a dedicated “414(h)” choice. Selecting “Other” or “Other deductible” is fine and won’t create any federal problem, because Box 1 has already been adjusted. Some programs include state-specific pension plan options; if your plan is listed by name, choose it. That helps the software apply your state’s add-back rule automatically if one exists.
The State Add-Back You Can’t Ignore
Not every state follows the federal treatment. In states that don’t conform, your mandatory 414(h) contribution is taxable for state purposes even though it was pre-tax federally. Those states require you to add the 414(h) amount back to your state taxable income, typically as an addition modification to federal adjusted gross income on a specific line of the state return.
If your state requires the add-back and you miss it, you’ll underreport state taxable income. That produces an underpayment notice, interest, and possibly penalties. State underpayment interest generally runs between 7% and 11% annually, so a small skipped add-back grows fast.
Other states conform to federal treatment and don’t require any adjustment. The only reliable way to know which rule applies to you is to check your state tax department’s instructions or the line-by-line guidance for your state’s return. If you moved between states during the year, expect each state to apply its own rule to the wages earned there.
What Happens When the Money Comes Back Out
The federal tax break is a deferral, not a permanent exclusion. Distributions from a qualified governmental retirement plan are taxable in the year you receive them under the annuity rules of Section 72.5Office of the Law Revision Counsel. 26 U.S. Code 402 – Taxability of Beneficiary of Employees Trust Pension payments in retirement are generally fully taxable to the extent they represent picked-up 414(h) contributions and their earnings, because none of that money was ever taxed on the way in.
If you leave government service before retirement and your plan lets you take a refund of your accumulated contributions, the refund is taxable as income in the year you receive it. The plan is required to offer you a direct rollover into a traditional IRA or another eligible retirement plan, which preserves the deferral.6eCFR. 26 CFR 1.401(a)(31)-1 – Requirement to Offer Direct Rollover of Eligible Rollover Distributions Take the cash instead and the plan will withhold 20% for federal taxes; if you’re under age 59½, a 10% early distribution penalty may also apply on top of ordinary income tax unless an exception fits your situation.
One point worth flagging for planning purposes: participating in a 414(h) pension does not reduce how much you can defer into a 457(b) plan if your employer offers one. The 457(b) elective deferral limit is separate from the annual additions limit that applies to your defined benefit pension.7Internal Revenue Service. How Much Salary Can You Defer if You’re Eligible for More Than One Retirement Plan