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What Does "Cafe 125" Mean on Your W-2 Tax Form?

Cafe 125 refers to IRS regulation code section 125, which governs cafeteria employee benefit plans. Think of it like building your meal at a cafeteria, but instead of food, you're selecting from a buffet of benefits like health insurance, life insurance and dependent care assistance. You pay for these benefits with pre-tax dollars, potentially saving you a bundle on taxes. However, not all benefits qualify under this section. For example, education assistance and certain transportation benefits aren't included.

A Win-Win Situation

For employees, opting for a cafeteria plan is a strategic move. Your contributions come out of your paycheck before taxes are calculated, leading to significant savings. This could not only save you money in federal income tax but also reduce your Social Security and Medicare taxes. Employers get a slice of the pie too. By offering these plans, they save on payroll taxes and potentially boost employee satisfaction, making it a win-win scenario.

Decoding the Boxes

When you get your W-2, Cafe 125 shows how much you've contributed to your cafeteria plan. It's usually in Box 14, under “Other,” and tells you how much of your income escaped taxation. Having Cafe 125 benefits does not make filing your taxes more complicated. The contributions you've made are reflected in your taxable wages in Box 1 of your W-2, which means you've already benefited from the tax advantages upfront.

Each benefit under Café 125 comes with its own tax rules. For instance, your health insurance premiums are free from federal income, Social Security and Medicare taxes. However, life insurance premiums of more than $50,000 are subject to Social Security and Medicare taxes. This is where the W-2 boxes come into play. Boxes 1, 3 and 5 represent your federal, Social Security and Medicare taxable wages, respectively. The premiums paid under a cafeteria plan are not included in these taxable wages if they are not subject to these taxes.

Navigating Contribution Limits and Corrections

The health Flexible Spending Arrangement (FSA) under Cafe 125 has a contribution cap. Employees can only elect up to $3,050 in salary reduction contributions, excluding any rollover amounts from previous years. If an employee accidentally contributes over this limit, the plan retains its status if certain conditions are met, like uniform application of terms and correction of excess contributions.

Adoption Benefits and HSAs

Under Cafe 125, adoption benefits provided by employers are exempt from federal income tax withholding. However, these benefits, except the forfeited ones from a cafeteria plan, are still subject to social security, Medicare and railroad retirement taxes. They must be reported in specific boxes on the W-2 form.

Employer contributions to HSAs, including those made through a cafeteria plan, are generally not subject to withholding or social security, Medicare or railroad retirement taxes, assuming the contribution is expected to be excluded from the employee's income. If this isn't the case, these contributions are subject to taxes and must be reported accordingly on the W-2 form.

Last Word

Understanding Cafe 125 empowers you to make informed decisions about your benefits. It's not just about tax savings, it's about maximizing your financial well-being.