The Employee Retirement Income Security Act (ERISA) of 1974 requires compensation plans to follow certain requirements in order to be considered “qualified”. A 401(k) plan typically meets all of these requirements, and is considered a qualifying deferment compensation plan under the standards of the ERISA.

A 401(k) is one in which your employer adds a certain percentage of your pretax wages to the plan. Known as elective contributions, the money in your plan is generally not required to have income tax withheld when it is first put into the retirement savings account, and you don’t need to report it as income on a Form 1040. Although they don’t count as taxable wages reported on a W-2 from your employer, 401(k) contributions are taxable for Social Security and Medicare. Also, the employer is required to report these wages in accordance with federal unemployment taxes.

Elective contributions can be limited by both the IRS and the specific terms of your retirement plan. 401(k) contributions are listed as an information item on line 12 of your W-2. It’s possible to receive 401(k) distributions as either a lump sum or a rollover provided all requirements are met.

Often, many 401(k) plans will allow hardship withdrawals, limited to the amount contributed by the employee. Earned income on the amount deferred can’t be withdrawn due to hardship and aren’t eligible for a rollover distribution.

If you withdraw from a 401(k) before you reach the age of 59 ½ you’re withdrawal is subject to 10% additional taxes. Hardship distributions do not qualify as an exception to the additional taxes, so be sure to check all associated taxes and fees before making a withdrawal.