The legality of fan fiction is something of an ongoing debate. For now, it’s covered under the Fair Use provisions of the US copyright laws, as long as no profit is made (hence our insistence on disclaimers acknowledging the copyright and declaring no profit is made).
While you can’t hold copyright on your fan fiction per se, we do hold that your Fair Use work is yours and yours alone, and so long as no profit is being made, the original copyright holder will probably never go beyond a cease and desist order should they decide fan fiction inspired by their work is a Very Bad Thing. But as far as passing around saved copies of fan fictions, we draw a very clear line here. We know it’s done, but AFF will not be a hub for that sort of thing, and I for one was exceedingly uncomfortable with AO3’s download feature and its format options. They have a not-for-profit with deep pockets and expensive lawyers behind them, however, so perhaps they’re okay with that risk. We don’t, and we’re not.
I will also say there are some sites out there which archive work (especially HP-related fan fiction) without the permission of the author. We view those as pirate sites, and we won’t allow links to them in our search threads, no more than we’ll allow hard copies to be passed around.
But Des is quite right about mods for games. A lot of game modders see their work incorporated into a game, and they don’t get a choice about that, but then again, if they’re consistently good, who knows? They might get a job. It’s much harder for a fan fiction writer to gain that level of respect (although I am still somewhat bemused by the fan fiction of a former fan fiction phenomenon...)