3945 / Is an employee generally taxed on the employer’s current contributions to a qualified plan?
No, unless the contributions are designated Roth contributions under a 401(k) plan.
A participant does not have to include contributions made by the employer in gross income when the participant’s rights in the plan become fully vested or when benefits can be paid, if elected by the participant (i.e., if the benefits are constructively received). Rather, there is no taxation until benefits actually are distributed to a participant. Delaying distribution will postpone taxation unless it is delayed too long and minimum distribution requirements are not met ( Q 3891 to Q 3909).1
Another exception to the general rule that employer contributions are not taxable when contributed is when the plan uses some of those contributions to purchase life insurance on the participant that is payable to a beneficiary of the participant. Basically, the participant reports as income the cost of the pure death benefit under the contract. This cost is determined based on a table referred to as Table 2001. For the method of determining the “cost” of such insurance protection taxable to the employee, see Q 3948.