The employer may or may not choose to contribute funds to each employee’s insurance premium. Several required documents are designed to ensure that a cafeteria plan is compliant with laws and regulations. The employee’s share of the cost is made through pretax payroll deductions. Without a Section 125 plan, employee contributions can only be made with after-tax dollars. Effectively, the employee pays for out-of-pocket expenses that aren’t covered by insurance with dollars set aside in an account.

While these are typical benefits, not all will prove non-taxable for Medicare and Social Security. For example, group life insurance premiums above ​$50,000​ don’t trigger federal income taxes, but deductions are taken out for Medicare and Social Security. If you receive benefits above that amount, the difference is taxed as wages and you will see it included in ​boxes 1, 3 and 5​.

  • Without a Section 125 plan, employee contributions can only be made with after-tax dollars.
  • Employees can be given the opportunity to receive medical, dental, vision and other qualified benefits and contribute to the cost on a pre-tax basis in lieu of receiving taxable wages.
  • Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018.
  • The plan documents must be updated and amended at least every five years to reflect any applicable plan changes or regulatory updates.
  • The exclusion cannot be more than the earned income of either the employee or the employee’s spouse.

US Legal Forms is created as an on-line option for DiLorenzo & Company Supplemental Guidelines for Preparing Form W-2 e-filing and provides numerous benefits for the taxpayers. Note that Archer Medical Savings Accounts (MSAs) are not eligible for Cafe 125 plans. These MSAs were created to help the self-employed and small businesses with medical care costs.

This is why we recommend working with a licensed benefits provider, be it a payroll provider like Gusto, a PEO like ADP Total Source, or an insurance company. Your employer doesn’t include your pretax payments in your taxable wages on your annual W-2. An employer’s health insurance plan must meet the criteria of Section 125 of the IRS code for pretax premium eligibility. Section 125 plans are better known as cafeteria plans, since they offer employees the ability to choose just some of their benefits. These benefits may be deducted from an employee’s paycheck before taxes are paid.

What does less Other Cafe 125 mean on my taxes?

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. 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. 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.

  • Both a cafeteria plan and a qualified small employer health reimbursement account are kinds of employer-sponsored health care that can be provided on a pretax basis.
  • Several required documents are designed to ensure that a cafeteria plan is compliant with laws and regulations.
  • With traditional company-sponsored healthcare insurance, the employer generally pays part of each employee’s premiums.
  • We believe everyone should be able to make financial decisions with confidence.
  • Because of that, you can’t find the benefits of the cafeteria plan in Box 1 of the W-2 form, which is the space allotted for the employee’s wages.
  • Your employees pay for these benefits with pre-tax money, which you don’t include in their taxable wages on their annual W-2s.

The premiums can be for employer-sponsored insurance plans or individual health policies. Cafeteria Plans are an employer-sponsored benefit that lets employees pay certain qualified medical expenses – such as health insurance premiums for medical, dental, and vision coverage – on a pre-tax basis. They are not taxed and are not included in your W-2 Box 1 wages so you can not deduct them as medical expenses.

This may sound like it has something to do with where you go on your lunch break, but there is a more reasonable explanation. “Cafe 125” stands for IRS regulation code section 125 regarding tax-free “cafeteria” employee benefit plans. As an added advantage, employees receive an effective raise without any additional cost to the employer. Employers need employees to adopt and engage with their benefits and one way to encourage employees to adopt and contribute to (i.e. engage with) an HSA, is for employers to match employees’ contributions.

The Benefits Not Allowed in a Cafe Plan

The tax remains 6% (or 0.6% if you receive the credit) on the first $7,000 of an employee’s wages. So, you pay less FUTA tax per check than you would without a section 125 plan. Offering competitive benefits attracts, satisfies, and retains top talent.

Understanding Section 125 Cafeteria Plans

Also you can rearrange the structure of the document by changing page order. Once you find a perfect What is irc125, all you need to do is adjust the template to your preferences or legal requirements. Apart from completing the fillable form with accurate details, you might need to erase some provisions in the document that are irrelevant to your circumstance. Alternatively, you might want to add some missing conditions in the original form.

Setting Up a Section 125 Plan

See Sections 3121(a)(5)(G) and 3306(b)(5)(G) of the Internal Revenue Code. Cafe 125, also known as a “cafeteria” plan, allows employees working for a company, business, or organization to process payments for certain expenses with pre-tax dollars. It is called a cafeteria plan because it provides employees with various options they can choose from when it comes to filing their tax returns to the IRS. On the flip side of it, the IRS doesn’t consider this money as the employees’ wage because the funds of this cafeteria plan are not part of the employee’s salary that they’re getting from their employers. Cafeteria, or Section 125 plans include employer-sponsored benefits that are exempt from federal and typically, state taxes. Your employees pay for these benefits with pre-tax money, which you don’t include in their taxable wages on their annual W-2s.

The employee may use the money towards another benefit; though, if the employee receives cash, that money is taxed. With a POP, employers do not have to pay FICA/FUTA taxes (~7.65%) on dollars that employees use toward the cost of their individual health insurance premiums. Zenefits is a benefits insurance provider that provides HRIS software and a full range of section 125-compliant health insurance like medical coverage, HSAs and FSAs.

Health Insurance Cost on W-2 – Code DD Many employers are required to report the cost of an employee’s health care benefits in Box 12 of Form W-2, using Code DD to identify the amount. It is included in Box 12 in order to provide comparable consumer information on the cost of health care coverage. There are many ways employers can provide benefits to employees and not all require a Section 125 Cafeteria Plan.

Tax Return

It may also include coverage of former employees, but cannot exist primarily for them. See the questions below for treatment of benefits made available to individuals who are not spouses or dependents of the employee. Employers do not have to allow employees to make midyear election changes except those under the HIPAA special enrollment rights. An employer should include in the plan documents and summary plan description information about which events, if any, would allow for an employee to make midyear election changes. Employers must ensure that the rules outlined in the plan document and SPD are followed. Failure to administer a plan in accordance with the written terms of the plan and the IRC can result in the loss of the benefits’ pretax status.