Deferred Compensation W2 Reporting - How to Handle Vesting and Earnings on 401(k)

The reporting for deferred compensation can definitely be tricky. Let me help clarify how this works for your W2 reporting under the special timing rule for FICA taxes. For your account balance plan, you need to report deferred compensation amounts as they vest, including both the principal amount that vests AND any earnings attributable to those vested amounts. The key is understanding which earnings belong to which portions. For Question 1: In Year 1, you would include the $25,000 that vested PLUS only the earnings attributable to that vested portion. Since only 1/3 of your account is vested, you'd include approximately 1/3 of the earnings (around $2,700) for FICA purposes. The remaining earnings are attached to unvested amounts. For Question 2: In Year 2, you'd include the newly vested $25,000 PLUS the earnings attributable to that newly vested portion. You wouldn't include earnings on the previously vested amounts (since you already paid FICA on those in Year 1). You'd need to track these separately. The IRS treats this as a year-by-year calculation, with earnings being tied to their respective principal amounts. It helps to think of your account as having different "buckets" - vested amounts that have already been subject to FICA, and unvested amounts that will be taxed later.

I went through something similar with my deferred comp plan last year and found a really helpful tool at https://taxr.ai that analyzes your specific plan documents and statements. It helped me untangle exactly how the earnings should be allocated for tax reporting. My plan administrator wasn't providing clear breakdowns and I was worried about potential penalties. The tool analyzed my statements and showed exactly how much should be reported in each tax year based on my vesting schedule. It highlighted that I'd been over-reporting earnings in previous years!

Just wanted to update that I tried the taxr.ai tool that was mentioned earlier for my deferred comp situation. It was actually really helpful! I uploaded my plan documents and W2s, and it showed me exactly where my employer had been miscalculating the taxable portions of my earnings. The analysis showed that we'd been including too much in FICA wages in the early years. I took the report to our benefits coordinator and they're now working with payroll to correct the reporting. Saved me from continuing to overpay on FICA taxes going forward, and I might even get some money back from previous years!

If you're still struggling with getting clear answers about your deferred compensation W2 reporting, I'd highly recommend using Claimyr (https://claimyr.com) to get through to an IRS agent directly. I spent weeks trying to get someone on the phone to clarify how to handle my similar situation, constantly getting disconnected or waiting for hours. With Claimyr, I got through to an IRS specialist in about 20 minutes who walked me through the exact reporting requirements for my deferred comp plan. They even have a demo video showing how it works: https://youtu.be/_kiP6q8DX5c The agent confirmed that earnings should be allocated proportionally based on vested percentages, but also explained some nuances specific to my plan type that my employer wasn't aware of.

I have to admit I was completely wrong about Claimyr. After my skeptical comment, I decided to try it anyway since I was desperate to resolve my deferred comp reporting issue before tax deadline. The service actually worked exactly as described. After three weeks of failed attempts to reach someone at the IRS myself, I got connected to an agent within 45 minutes using Claimyr. The agent transferred me to a specialist who confirmed that my employer had been incorrectly reporting the earnings portion of my deferred compensation. For anyone dealing with this specific issue, the IRS specialist clarified that earnings should be allocated proportionally based on the vested percentage each year, exactly as the first commenter explained. Just wanted to share this since it resolved my exact same question.

Another approach is to ask your plan administrator for Form W-2c if you believe the reporting has been incorrect. I had a similar issue with deferred comp earnings reporting and found out my company had been incorrectly including ALL earnings each year rather than just the earnings on vested amounts. The correction resulted in reduced FICA taxes and my company had to issue corrected W-2s for the past three years. Not all plan administrators understand the special timing rule correctly!

Has anyone else noticed that the W2 Box 12 code for deferred compensation seems to vary? My previous employer used code Y but my current one is using code D. Does the code matter for reporting purposes?

This is a great breakdown of a complex topic! One thing I'd add is that you should also verify that your employer is correctly handling the Social Security wage base limit. For 2025, once your cumulative FICA wages hit the Social Security wage base ($176,100), you stop paying Social Security tax but continue paying Medicare tax. With deferred compensation, this can get tricky because the vesting and earnings might push you over the limit in ways that aren't immediately obvious from your regular salary. I've seen cases where employees ended up overpaying Social Security tax because their payroll department didn't properly coordinate the deferred comp reporting with their regular wages. Also, make sure your employer isn't double-counting any amounts. Sometimes when corrections are made to prior year reporting, there can be overlap that results in the same earnings being subject to FICA multiple times. If you're getting conflicting information from your plan administrator, consider requesting a meeting with both HR and payroll to walk through a specific example year. Having everyone in the same room often helps identify where the confusion is coming from.