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 or Form 1040-SR, U.S. Tax Return for Seniors, because 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 in box 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 Topic no. 412, Lump-sum distributions, Do I need to report the transfer or rollover of an IRA or retirement plan on my tax return? and Topic no. 413, Rollovers from retirement plans. To determine if your distribution is taxable, refer to Is my pension or annuity payment taxable?
Hardship withdrawals - Many 401(k) plans allow employees to make a hardship withdrawal because of immediate and heavy financial needs. Historically, hardship distributions from a 401(k) plan were generally limited to the amount of the employees' elective contributions only, and didn't include any income earned on the deferred amounts. However, since 2019, the plan may expand the funds available for hardship distributions. 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. For more information, refer to Topic no. 558, Additional tax on early distributions from retirement plans other than IRAs or Do I meet an exception to the additional tax on early distributions from IRAs or retirement plans? 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.