A section 401(k) plan is a type of deferred compensation plan in which an employee can elect to have the employer contribute a portion of his or her wages to the plan on a pre–tax basis. These deferred wages are not subject to income tax withholding at the time of deferral, and they are not reflected on your Form 1040 since they were not included in the taxable wages on your Form W-2 . However, they are included as wages subject to social security, Medicare, and federal unemployment taxes. The amount that an employee may elect to defer to a 401(k) plan is limited. During 2003, an employee cannot elect to defer more than $12,000 for all 401(k) plans in which the employee participates.
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