Under a cafeteria, or Section 125, plan, you pay for your employer-sponsored benefits with pretax money. Your employer deducts your payments from your wages before withholding certain taxes. Your employer doesn't include your pretax payments in your taxable wages on your annual W-2. It may, however, choose to report certain benefits on your W-2 and code them as Café 125. In some cases, cafeteria plan reporting on your W-2 is mandatory.
Cafeteria plan benefits come in various forms, including health and life insurance, dependent care and adoption assistance, accident insurance and health savings accounts. Each benefit has its own tax implication; not all benefits are excluded from the same taxes. For example, no federal income tax, Social Security tax or Medicare tax comes out of your health insurance premiums. However, your life insurance premiums on coverage over $50,000 are subject to Social Security and Medicare taxes, but not federal income tax. Boxes 1, 3 and 5 of your W-2 respectively stand for your federal, Social Security and Medicare taxable wages. Your cafeteria plan premiums aren't included in the taxable wages of those boxes if they aren't subject to the tax.
Your employer may report your cafeteria plan deductions in Box 14, which is labeled “Other.” It might use the code “Section 125” or “Café 125,” and then state your pretax payments. This data is optional and can clear up any confusion you have about the amount in Box 1. For example, the year-to-date gross amount on your last pay stub for the year shows all of your wages for the year, including your pretax payments. Box 1 of your W-2 shows only your taxable wages. If you add the amount in Box 14 to the amount in Box 1, it should equal the amount shown on your pay stub. Your employer can show other types of payments and wages in Box 14, such as union dues, nontaxable income, educational assistance payments and certain contributions to a pension plan.
Federal law requires that employers providing group health insurance must report the value of the coverage in Box 12 of employees’ W-2, under Code DD. This amount includes the total paid by the employer and its employees. Only specific types of coverage must be reported; others aren't required or are optional. For example, your employer must report the cost of major medical, but your contributions to a health flexible spending account aren't reportable. The data in Box 12 is for informational purposes only, so employees know the cost of their health coverage. Your employer may also use Box 12 to report certain retirement plan contributions and nontaxable moving expenses, under the required codes.
If you have a Section 125 dependent care plan, your employer must report any amounts it and you paid toward your account in Box 10. As of 2013, dependent care benefits of up to $5,000 are nontaxable; if you’re married filing a separate tax return, your limit is $2,500. Amounts over the limits are taxable and must go in your taxable wages in Boxes 1, 3 and 4.
The cafeteria plan amounts on your W-2 don't change your tax preparation and filing process. Since you paid your premiums with pretax money, the amounts are already deducted from your taxable wages in Box 1. You receive a tax deduction when you paid the premium; therefore, you don’t qualify for a deduction at tax time.
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- IRS.gov: FAQs for Government Entities Regarding Cafeteria Plans
- IRS.gov: 2013 Form W-2
- IRS.gov: 2013 General Instructions for Forms W-2 and W-3
- IRS.gov: Form W-2 Reporting of Employer-Sponsored Health Coverage
- Office of the New York State Comptroller: A Brief Description of State of New York Form W-2 (Wage and Tax Statements)
- Intuit TurboTax: What Is "Cafe 125" on a W-2 Tax Form?