If you work for a state or local government and see a “414(h)” amount on your W-2, it’s the mandatory contribution your employer sent to your pension plan out of your paycheck, then treated as employer money for federal income tax purposes. The figure sits in Box 14 and has already been subtracted from the wages in Box 1, so your federal income tax was calculated on the lower amount. You don’t deduct it again on your return.
That’s the short answer. The rest of what you need to know is why the number shows up where it does, why some other W-2 boxes look inconsistent with Box 1, and what — if anything — you have to do with it at tax time.
What 414(h) Actually Is
Section 414(h)(2) of the Internal Revenue Code lets a government employer “pick up” the pension contributions its employees are required to make. The employer formally designates the contributions as its own through a resolution or ordinance, and employees can’t be given the choice to take the money as cash instead.1Internal Revenue Service. Employer Pick-Up Contributions to Benefit Plans Once those conditions are met, the IRS treats the money as employer contributions even though it comes out of your gross salary.2Office of the Law Revision Counsel. 26 U.S. Code 414 – Definitions and Special Rules
That legal recharacterization is the whole reason the amount is excluded from your federal taxable wages. The contribution rate is set by whichever public retirement system you belong to and is usually a fixed percentage of your salary.
What It Does to Your W-2
The most visible effect is on Box 1. Your employer subtracts the total annual 414(h) contribution from your gross salary before filling in the Box 1 figure that determines your federal income tax.1Internal Revenue Service. Employer Pick-Up Contributions to Benefit Plans Federal withholding in Box 2 was calculated against that lower number all year.
A quick example. If your gross salary is $80,000 and your mandatory pension contribution through a 414(h) pick-up is $6,000, Box 1 will show $74,000. The $6,000 never enters your gross income and stays out of your adjusted gross income, which can matter for benefits tied to AGI thresholds such as traditional IRA deductibility, education credits, and the student loan interest deduction. One benefit it won’t help you claim is the Saver’s Credit, which specifically excludes 414(h) contributions.
Why Box 3 and Box 5 Can Look Different
Here’s where the W-2 tends to confuse people. The pick-up shelters your contribution from federal income tax only. It doesn’t shelter it from Social Security or Medicare tax if those apply to your job.1Internal Revenue Service. Employer Pick-Up Contributions to Benefit Plans So the wages in Boxes 3 and 5 can be higher than the wages in Box 1.
Complicating things further, not every government worker is subject to Social Security. Federal law generally excludes state and local employees from Social Security if they belong to a qualifying public retirement system, unless the employer has a Section 218 agreement with the Social Security Administration or another coverage rule applies.3Office of the Law Revision Counsel. 26 U.S. Code 3121 – Definitions Medicare, on the other hand, is mandatory for nearly all state and local government employees hired after March 31, 1986.4Internal Revenue Service. State and Local Government Employees Social Security and Medicare Coverage
That gives you three W-2 patterns you might see when a 414(h) amount is present:
- Covered by both Social Security and Medicare: Box 1 is lower than Boxes 3 and 5. Box 3 and Box 5 both reflect your full gross salary, with Box 3 capped at the Social Security wage base of $184,500 in 2026.5Social Security Administration. What Is the Current Maximum Amount of Taxable Earnings for Social Security
- Medicare only, no Social Security: Box 3 is zero or blank, Box 5 shows your full gross salary, and Box 1 is lower than Box 5 by at least the 414(h) amount.
- Exempt from both, which is rare and mostly affects employees hired before April 1986 who never gained coverage: both Box 3 and Box 5 may be zero or blank.
Higher earners have one more thing to watch. If your Medicare wages in Box 5 exceed $200,000, your employer withholds an additional 0.9% Medicare tax on the excess, and your 414(h) contribution counts toward that threshold because it stays in Medicare wages.6Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates
Where to Find It and How to Check the Math
The 414(h) amount appears in Box 14, which employers use for informational items that don’t fit anywhere else. Labels vary. You’ll see “414H,” “414(h),” “IRC 414H,” or sometimes “Pick-Up.” The IRS specifically tells employers not to put 414(h)(2) contributions in Box 12, so if you were looking there for your pension money, that’s why it isn’t showing up.1Internal Revenue Service. Employer Pick-Up Contributions to Benefit Plans
If the 414(h) contribution is the only pre-tax item reducing your Box 1 wages, you can verify it. For employees covered by both Social Security and Medicare, Box 3 minus Box 1 should equal the Box 14 figure. For Medicare-only employees, compare Box 5 minus Box 1 to Box 14. If you also contribute to a 457(b), 403(b), or similar pre-tax plan, the gap will be bigger than the 414(h) amount alone, but the 414(h) figure should account for part of it.
What to Do With It at Tax Time
On your federal return, almost nothing. The tax break is already built into Box 1, and you don’t claim a separate deduction or make any adjustment on your 1040. The Box 14 figure is informational.
When you use tax software, it may ask you to categorize the Box 14 entry. Pick the option for a 414(h) retirement contribution or a governmental pension pick-up. Choosing the wrong category usually won’t change your federal tax, but it can produce errors on a state return if your state treats 414(h) differently.
Don’t try to claim the amount a second time as an IRA contribution or an unreimbursed employee expense. The deferral already happened through payroll, and doubling up will draw an IRS notice.
State Tax Is a Separate Question
Federal law defers income tax on 414(h) contributions. Some states don’t follow that rule and require you to add the 414(h) amount back to federal AGI when calculating state taxable income. In those states, you pay state income tax on the contributions now, and typically won’t be taxed again on that portion when pension benefits are paid later. Other states mirror the federal treatment. There is no single national rule. Check your state return instructions for a “modification” or “addition” tied to 414(h) retirement contributions, or ask your payroll office which treatment applies.
When You’ll Eventually Pay Federal Tax on It
Because the contributions were never taxed as income going in, they’ll be taxed as ordinary income coming out. Pension payments in retirement are generally fully taxable at whatever your federal rate is at that time. It’s the same trade as a traditional 401(k) or traditional IRA: defer now, pay later.
Two situations bring the tax forward. If you take a lump sum or eligible rollover distribution without rolling it directly into another retirement account, the plan must withhold 20% for federal income tax before releasing the funds.7eCFR. 26 CFR 31.3405(c)-1 – Withholding on Eligible Rollover Distributions And if you take money out before age 59½, you generally owe a 10% early distribution tax on top of ordinary income tax.8Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
Two exceptions to the 10% penalty are common in the public sector:
- If you separate from service in or after the year you turn 55, the 10% penalty doesn’t apply to distributions from that employer’s plan.
- For qualifying public safety employees — including firefighters, law enforcement officers, and corrections officers — that age drops to 50 if they’ve separated from service.8Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
If you leave public employment before you’re eligible for a pension, contributions to 414(h) plans are typically fully vested from day one, so your own money is always yours to take. Cashing it out triggers the ordinary income tax and, if you’re under 59½, the 10% penalty. A direct rollover into a traditional IRA or another eligible retirement plan avoids both the tax and the 20% withholding by moving the funds without your ever touching them.9Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions