IRS Identifies Common Errors to Avoid in Form W-2, W-3 Retirement Plan Codes

Author: Rena Pirsos, XpertHR Legal Editor

Now that employers are busy working to provide employees with required copies of 2013 federal Forms W-2, Wage and Tax Statement, by the annual January 31 deadline, the Internal Revenue Service (IRS) has identified the most common errors employers make when entering codes for retirement plan information on the form, and on Form W-3, Transmittal of Wage and Tax Statements. The IRS cautions employers to avoid these errors and ensure that the forms they issue to employees contain correct retirement plan information because:

  • Employees need accurate information to determine the correct deductions and credits on their personal income tax returns; and
  • IRS agents use the information from the forms to determine whether an employer is complying with income and employment tax reporting requirements.

Common Mistakes

The IRS states that its agents often find during examinations of Form 5500, Annual Return/Report of Employee Benefit Plan, and Employee Plans Compliance Unit (EPCU) projects that employers use incorrect codes in Box 12 of Form W-2.

The IRS provides the following examples:

  • Code D, used to report Internal Revenue Code (IRC) § 401(k) elective deferrals, incorrectly included IRC § 403(b), § 457 or nonqualified amounts.
  • Code E was entered for IRC § 403(b) contributions, but the employer did not have a § 403(b) plan.
  • Code H, which is used to report elective deferrals to an IRC § 501(c)(18)(D) tax exempt organization plan, was used to incorrectly report health benefits. (The IRS found that only six percent of employers that used this code actually contributed to a § 501(c)(18)(D) plan.)
  • Code S was used to report a SIMPLE § 401(k) plan, but the correct code for such a plan is Code D.

Employers are advised to consult the Instructions for Form W-2 and W-3 for the complete list of codes and what they should be used for.

Form W-2, Box 13

The "Retirement plan" indicator in Box 13 shows whether an employee is an active participant in an employer's plan. The IRS states that, if this box is checked, it lets the recipient of the Form W-2 know that, depending on their filing status and modified adjusted gross income, he or she may not be entitled to a full deduction for their traditional IRA contributions. Accordingly, an employer should check the retirement plan box on an employee's Form W-2 if the employee was an active participant for any part of the year in any of the following:

  • A qualified pension, profit-sharing or stock-bonus plan under IRC § 401(a) (including a § 401(k) plan);
  • An annuity plan under IRC § 403(a);
  • An annuity contract or custodial account under IRC § 403(b);
  • A simplified employee pension (SEP) under IRC § 408(k);
  • A SIMPLE retirement account under IRC § 408(p);
  • A trust described in IRC § 501(c)(18); or
  • A plan for federal, state or local government employees or by an agency or instrumentality thereof (other than an IRC § 457(b) plan).

The IRS defines an active participant generally as an employee covered by a:

  • Defined contribution plan (e.g., an IRC § 401(k) plan) for any tax year and is credited with any contributions or forfeitures; or
  • Defined benefit plan for any tax year that he or she is eligible to participate.

The IRS advises employers not to check the retirement plan box if they only have nonqualified, or IRC § 457, plans.

Form W-3, Box b

Form W-3, Box b has checkboxes to specify the type of employer filing the form. Employers are advised to check the appropriate box, and only one box, if it is any of the following employer types:

  • A non-governmental tax-exempt IRC § 501(c) organization;
  • A state or local government or instrumentality;
  • A state or local government or instrumentality that has received an IRS determination letter stating that it is also an IRC § 501(c)(3) tax-exempt organization; or
  • A federal government entity or instrumentality.

Otherwise, the employer should check the "None apply" box.