Effects of 414H Contributions
Contributions to 414H retirement plans reduce the amount of your pay that counts as taxable income for that year. For example, if your base salary is $50,000 but $4,000 is withheld for 414H contributions, you only report $46,000 of taxable income that year. However, 414H contributions are treated as employer contributions, not employee contributions: They are already taken out of the taxable income shown on your W-2, so you don't claim a deduction for them on your taxes. In addition, they do not qualify for the Retirement Savings Credit.
Can't Avoid Taxes Forever
While the money grows in your 414H plan, you won't have to pay any taxes on the gains. However, when retirement comes and you start taking distributions, those amounts will count as taxable income at that time. This makes the tax benefits of the 414H plans especially valuable if you are in a higher tax bracket now than you expect to be in when you take withdrawals.