Key Takeaways
- Cafeteria plans, covered under section 125 of the Internal Revenue Code, allow employees to set aside pre-tax income for certain employer-offered benefits, such as adoption assistance, dependent care assistance, accident and health insurance, and group term life insurance policies.
- Employers can save money by offering cafeteria plans to employees, as most plans are not subject to Medicare taxes and payroll taxes are generally lower.
- Employees have the advantage of choosing which programs to enroll in and which to decline to get the specific benefits that are most important to them.
- Cafe 125 should already be subtracted from the total amount of wages reported in box 1 on your W-2.
Included plans
Employers can choose to set up “cafeteria plans” under section 125 of the Internal Revenue Code for a variety of reasons. These cafeteria plans allow employees to set aside pre-tax income for certain employer-offered benefits. Benefits provided by plans covered under section 125 include:
- adoption assistance
- dependent care assistance
- accident and health insurance
- group term life insurance policies
- dependent care assistance
They are called cafeteria plans because employees are given a list of benefits to choose from, similar to a cafeteria-style menu.
Some benefits not covered by section 125 include:
- education assistance
- Archer Medical Savings Accounts
- meals and transportation benefits
Employer benefits
Offering cafeteria plans to employees can save money for employers. Most cafeteria plans are not subject to Medicare taxes, and by allowing employees to defer income to these programs, employers generally pay less in payroll taxes. Cafeteria plans also can build employees' loyalty within the company by saving them money and offering benefits they could not otherwise afford.
TurboTax Tip:
You can benefit from cafeteria plans by saving hundreds or thousands of dollars in income taxes and Social Security and Medicare taxes over the course of a year.
Employee advantages
The employee advantages of enrolling in cafeteria plans are simple. Income allotted to cafeteria plans is taken directly from an employee's paycheck before taxes are taken out. These pre-tax contributions can save the employee hundreds—possibly even thousands—of dollars in income taxes and Social Security and Medicare taxes over the course of a year. Employees also have the advantage of choosing which programs to enroll in and which to decline to get the specific benefits that are most important to them.
Considerations
Having Cafe 125 reported on your W-2 does not change the way you prepare and file your tax return. The money deferred to pretax plans should already be subtracted from the total amount of your wages reported in box 1 on your W-2. You should verify that this information is reported correctly before filing your tax return.
If you find a discrepancy on Form W-2, you should contact your employer immediately to have it corrected. Also, remember that these benefits are paid for with pre-tax dollars so they are not eligible to be used as a deduction on your return. For example, health insurance is a common benefit offered by these plans, but you cannot also use these costs as a medical deduction on Schedule A if you paid for them through your cafeteria plan.
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