Contributions to a 414h are handled the same as contributions to a 401k at the federal level; - it will reduce taxable income reported in the form W2 box 1 - http://www.irs.gov/pub/irs-pdf/fw2.pdf - It is also should be reported in the box 12
You do not need to report that contribution on 1040 form, but only report it for saver's credit if you are eligible. Use Form 8880, Credit for Qualified Retirement Savings Contributions - http://www.irs.gov/pub/irs-pdf/f8880.pdf
You are correct - according to instructions to form W2 - http://www.irs.gov/pub/irs-pdf/iw2w3.pdf page 11
. Also, do not report in box 12 section 414(h)(2) contributions (relating to certain state or local government plans). Instead, use box 14 for these items and any other amount elected by the employee for the year for dependent information that you wish to give to your employee.