[{"@context":"https:\/\/schema.org\/","@type":"Article","@id":"https:\/\/moneydoneright.com\/taxes\/personal-taxes\/irs-code-3401\/#Article","mainEntityOfPage":"https:\/\/moneydoneright.com\/taxes\/personal-taxes\/irs-code-3401\/","headline":"IRC Section 3401: What Are 3401(a) Wages?","name":"IRC Section 3401: What Are 3401(a) Wages?","description":"Retirement plans can be a significant factor that prompts employees to commit to organizations...","datePublished":"2023-04-25","dateModified":"2023-04-25","author":{"@type":"Person","@id":"https:\/\/moneydoneright.com\/author\/logan-allec\/#Person","name":"Logan Allec, CPA","url":"https:\/\/moneydoneright.com\/author\/logan-allec\/","identifier":4,"image":{"@type":"ImageObject","@id":"https:\/\/secure.gravatar.com\/avatar\/6e74dd0453a5871d1dcfde6d40d9494765ca8bfdb01927cefee4564d4bee9075?s=96&d=mm&r=g","url":"https:\/\/secure.gravatar.com\/avatar\/6e74dd0453a5871d1dcfde6d40d9494765ca8bfdb01927cefee4564d4bee9075?s=96&d=mm&r=g","height":96,"width":96}},"publisher":{"@type":"Organization","name":"Money Done Right","logo":{"@type":"ImageObject","@id":"https:\/\/moneydoneright.com\/wp-content\/uploads\/Money-Done-Right-Personal-Finance-and-Investing-Blog.png","url":"https:\/\/moneydoneright.com\/wp-content\/uploads\/Money-Done-Right-Personal-Finance-and-Investing-Blog.png","width":488,"height":60}},"image":{"@type":"ImageObject","@id":"https:\/\/moneydoneright.com\/wp-content\/uploads\/irs-code-3401.png","url":"https:\/\/moneydoneright.com\/wp-content\/uploads\/irs-code-3401.png","height":460,"width":1900},"url":"https:\/\/moneydoneright.com\/taxes\/personal-taxes\/irs-code-3401\/","about":["Personal Taxes"],"wordCount":786,"articleBody":"Retirement plans can be a significant factor that prompts employees to commit to organizations in the long run. As a result, employers and employees should have a basic understanding of IRC Section 3401 and its implications on retirement plans.This section of the IRC is essential for 403(b) plan holders because it outlines the tax-exempt rules organizations and public schools must follow when withholding a portion of their employees\u2019 salary and contributing it to this plan.Familiarity with Section 3401 can also benefit new businesses searching for the right retirement plan they intend to offer their employees.Let\u2019s dive deeper into IRC Section 3401 and explore how it affects retirement plans.Table of ContentsToggleOverview of IRC Section 3401Comparison of W-2 and 3401(a) WagesThe Importance of Section 3401 for Retirement PlansFrequently Asked QuestionsOverview of IRC Section 3401The section defines the term wages for federal income tax withholding and retirement plan purposes. It\u2019s often referred to as the pay stub compensation definition because Section 3401(a) implies that only wages listed on an employee\u2019s pay stub are subject to withholding.This section of the IRC defines wages as:\u2018The term wages means all remuneration (other than fees paid to a public official) for services performed by an employee for his employer.\u2019The definition indicates that employers must withhold federal taxes from the following income types:Wages.Salaries.Tips (over $20 per month).Bonuses.Relocation expenses.Salary reductions.Insurance premium commissions.Unfunded unqualified plan receipts.Sales commissions.According to Section 3401, the property or restricted stock at risk of forfeiture is also subject to federal tax withholding if such risk no longer exists. In addition, employers must withhold taxes from non-qualified stock options added to the income during a tax year.However, income from sales of qualified stock options is excluded from Section 3401(a) compensation definition.Comparison of W-2 and 3401(a) WagesGroup term life insurance over $50,000 is the most significant difference between W-2 and 3401(a) wage definitions because IRS Section 3401 doesn\u2019t indicate that group life insurance over $50,000 should be treated as income.Both definitions are similar to the IRC Section 415(c) Compensation definition, with the biggest difference being that the statutory definition also includes taxable disability and medical benefits.Neither definition of compensation in the IRC includes the following sources of income:HSA employer contributions.Worker\u2019s compensation.Nontaxable fringe benefits.Severance pay.3401(a) wages generally include fewer pay codes than the W-2 compensation definition, which can affect how the retirement plan\u2019s 415 limits are calculated.For instance, in 2023, the maximum salary deferral is $22,500, the annual addition contribution is $66,000, and the yearly compensation limit applicable to 401(k) retirement plans is $330,000.The same limits apply to 403(b) plans that commonly rely on Section 3401(a) wage definition.The Importance of Section 3401 for Retirement PlansThe important thing to note is that employers can choose which compensation definition best matches their retirement plan. Hence, an employer doesn\u2019t have to opt for the 3401(a) definition if they think the W-2 wage definition better fits their established plan.Most 403(b) plans refer to Section 3401(a) compensation definition to determine which income sources should be excluded from federal taxation. This is because 403(b) contributions are allocated to individual accounts, and they\u2019re not taxed until the taxpayer uses the allocated funds.However, opting for a ROTH account will immediately make 403(b) contributions subject to federal taxes, but the remaining amount will be tax-free when distributed.It\u2019s worth noting that 403(b) plans are commonly offered by these employers:Public schools and universities.Hospitals.Tax-exempt organizations.Ministers.Employees that already participate in a 401(k) or 457(b) plan cannot contribute to a 403(b) plan. In addition, you may not be eligible for this plan if you work less than twenty hours per week or contribute less than $200 per year.High administrative costs and limited investment options are some of the most significant downsides of the 403(b) plan.Frequently Asked QuestionsAre 403(b) Plans the Same as Tax-Sheltered Annuity Plans? 403(b) title refers to tax-sheltered annuity plans commonly available through charitable organizations and public schools.  What Does IRC Section 3401(a) (5) Refer To? This section of the IRC specifies that the compensation paid for services performed by an employee of a foreign government is not treated as wages. As such, it isn\u2019t subject to federal taxation.\u00a0  How Does IRC Section 3401 Define an Employer? According to Section 3401 of the IRC, any individual or organization that hires employees to perform a service of any nature, temporarily or continually, is considered an employer.\u00a0  Are Funds Paid Under a Medical Plan Included in Section 3401 Compensation Definition? All amounts paid to an employee under a medical plan are excluded from the Section 3401 compensation definition if they\u2019re includable in the annual income.  "},{"@context":"https:\/\/schema.org\/","@type":"BreadcrumbList","itemListElement":[{"@type":"ListItem","position":1,"name":"Taxes","item":"https:\/\/moneydoneright.com\/taxes\/#breadcrumbitem"},{"@type":"ListItem","position":2,"name":"Personal Taxes","item":"https:\/\/moneydoneright.com\/taxes\/\/personal-taxes\/#breadcrumbitem"},{"@type":"ListItem","position":3,"name":"IRC Section 3401: What Are 3401(a) Wages?","item":"https:\/\/moneydoneright.com\/taxes\/personal-taxes\/irs-code-3401\/#breadcrumbitem"}]}]