Other benefits can include accident and disability coverage, dependent care assistance, and group-term life insurance. 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.
What Is “Cafe 125” on a W-2 Tax Form? Sapling
I discovered I had been enrolled in a dependent care FSA that I completely forgot about signing up for during open enrollment. The portal showed exactly when I enrolled and what the monthly deduction was. It might help you piece together what’s causing that Cafe 125 line on your W-2.
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In addition, depending on the size of your company and where you do business, there may be state-specific requirements affecting your cafeteria plans. A cafeteria plan is a pretax benefits plan that meets the specific requirements of section 125 of the Internal Revenue Code of the IRS. A Section 125 Premium Only Plan allows employees to pre-tax insurance premium such as group health and dental, vision, accident, term life insurance, disability, etc. Employees save up to 40% in payroll taxes and the employer save 7.65% in matching FICA taxes.
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. Section 125 plans, also known as cafeteria plans, are benefit plans established under Internal Revenue Code Section 125. They allow employees to pay for certain qualified expenses on a pre-tax basis. The “Other Cafe 125” entry on your W-2 is crucial for ensuring accurate tax reporting, particularly regarding benefit limits and potential tax liabilities if limits are exceeded. For example, if your salary is $50,000 and you contribute $3,000 toward your health insurance premiums and $1,500 to a flexible spending account, your taxable income would be reduced to $45,500. Therefore, Cafe 125 deductions lower the amount of taxes you owe without reducing your overall compensation.
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. Contributions to a Section 125 plan reduce an employee’s taxable income, providing a tax advantage. Common benefits include health, dental, and vision insurance premiums, and contributions to Flexible Spending Accounts (FSAs) for healthcare or dependent care. Other benefits may include group-term life insurance, accident and disability coverage, and adoption assistance. These pre-tax contributions are deducted from an employee’s paycheck before taxes are calculated, lowering reported taxable wages.
Impact on Your Paycheck and Taxes
It provides details of the employee’s gross pay, taxes withheld, and current W-4 profile. It includes boxes and fields with information typically found on a W-2 form such as wages, social security and medicare wages, federal taxes withheld and the employer’s name and ID number. Participation in a Section 125 plan offers significant tax benefits to employees.
What is a section 125 plan?
These circumstances in and of themselves are not enough to justify a special open enrollment. Employees usually have to provide a marriage license, birth certificate, letter from an insurance company or other documentation to prove their eligibility. 📞 Contact The Policy Shop to calculate your company’s potential savings. The Policy Shop is here to help you set up and optimize your Section 125 plan. At eastphoenixau.com, we have collected a variety of information about restaurants, cafes, eateries, catering, etc. On the links below you can find all the data about Less Other Cafe 125 Mean you are interested in.
- Thanks for explaining that – I just checked my W-2 and you’re right, Boxes 3 and 5 are higher than Box 1.
- An alternative to these plans are section 105 plans where employers reimburse employees for premiums they actually pay for, as opposed to pre-funding an account.
- Specifically, employers use these plans to provide their employees with a choice between cash and certain qualified benefits without adverse tax consequences.
- 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.
- Cafeteria plans also can build employees’ loyalty within the company by saving them money and offering benefits they could not otherwise afford.
A section 125 plan is part of the IRS code that enables and allows employees to take taxable benefits, such as a cash salary, and convert them into nontaxable benefits. These benefits may be deducted from an employee’s paycheck before taxes are paid. Cafeteria plans are particularly good for participants who have regular expenses related to medical issues and child care. A Sec. 125 plan is required for employers who want to allow employees to choose the qualified benefits they want and avoid paying income taxes on the amount of wages they contribute to obtain those benefits.
- Offering cash payments or non-tax-free benefits, such as a cash-out option for unused benefits, could trigger tax consequences, jeopardizing the plan’s tax-favored status.
- Employees can only elect up to $3,050 in salary reduction contributions, excluding any rollover amounts from previous years.
- For instance, an employee contributing $2,500 to a healthcare FSA reduces taxable income by that amount.
- A Section 125 plan is a powerful tool that reduces taxes, boosts employee satisfaction, and saves businesses money.
- Cafeteria plans can cost as little as a few dollars a month to thousands of dollars a year per employee, depending on how much you, the employee want to contribute.
Employers also save on Social Security and Medicare taxes due to reduced taxable payroll. A POP plan is the simplest type of section 125 plan and is easy to roll out and maintain. If you add the amount in Box 14 to the amount in Box 1, it should equal the amount adp less other cafe 125 shown on your pay stub.
On average, benefits for non-highly compensated employees must be at least 55% of those provided to highly compensated employees. Failing this test can result in benefits being reclassified as taxable income. Non-discrimination criteria ensure cafeteria plans treat all employees fairly, covering eligibility, benefits, and key employees. Explore the essentials of IRC 125 and understand how cafeteria plans function, including eligibility, benefits, and tax implications.
Except you can’t contribute to an HSA and Healthcare FSA at the same time. Let’s explore the advantages of each to help you decide which wins in HSA vs FSA. By setting up a Section 125 Cafeteria Plan, employers give themselves the flexibility to offer benefits like HSAs and FSAs and set the eligibility and contribution rules that make sense for their company.