With tax time just around the corner, here are some important tips about how to report your employees’ retirement plan contributions on their W-2s.

Thanks to MERS tax-favored status from the Internal Revenue Service, your employees have the benefit of saving for retirement without paying taxes on their mandatory contributions, until they use them later on. This “pre-tax” status doesn’t apply for Social Security or Medicare withholding, only federal and state income tax.

For example, if an employee is required in 2010 to contribute 2% of their gross earnings of $30,000 (equaling $600) toward pension contributions made by their employer, federal and state withholding taxes would be calculated on $29,400 ($30,000 minus 2%), but Social Security and Medicare withholding would still be calculated on the full $30,000.

Here are a few other key points:

• For year-end W-2 reporting, Box 1 of the employee’s W-2 (Wages, tips, and other compensation) should reflect compensation AFTER pension contributions to the Plan have been deducted ($29,400 in the above example), and Boxes 3 (Social Security wages) and 5 (Medicare wages and tips) should reflect compensation BEFORE the Plan deductions ($30,000 in the above example). Employee contributions (like the 2% plan contribution above) are reported in Box 14 with a code of 414(h) (2).
• Box 13 should be checked, for “Retirement Plan,” if the employee was an active participant for any part of the year.
• For participants of the MERS Health Care Savings Plan, the tax treatment is somewhat different. Because the IRS declared the Health Care Savings Program a Section 115 integral governmental trust by Private Letter Ruling, mandatory employee contributions to the program are not reported on the W-2.
• Section 457 withholdings that are withheld for municipalities having deferred compensation plans continue to go into Box 12 on the W-2 with a code of G.
• In 2012, the federal Patient Protection and Affordable Care Act will require employers to report the value of employer-provided health insurance coverage on W-2s. We’ll send out reminders of the new requirement in 2011. For more information, visit www.irs.gov.