What Does CAFE Mean on Your W2 Tax Form?

The W2 tax form summarizes an employee’s annual wages and the taxes withheld by their employer. It provides necessary figures for reporting income to the Internal Revenue Service (IRS) and state tax agencies. Understanding the various entries on a W2 ensures accurate tax filing and helps taxpayers identify how their earnings and benefits are reported.

Understanding Cafeteria Plans

A cafeteria plan, also known as a Section 125 plan, is an employer-sponsored benefit program that allows employees to choose between receiving cash or certain qualified benefits. It provides flexibility and tax advantages by enabling employees to pay for benefits with pre-tax dollars. Funds contributed to the plan are deducted from an employee’s gross income before taxes are calculated.

Common types of benefits offered through these plans include health insurance premiums for medical, dental, and vision coverage. Additionally, cafeteria plans can include Flexible Spending Accounts (FSAs) for healthcare expenses and dependent care, Health Savings Accounts (HSAs), and sometimes group-term life insurance up to a certain limit. Employee contributions to these plans are typically made through salary reduction agreements, which reduces the employee’s taxable wages.

The structure of a cafeteria plan requires that employees have a choice between at least one taxable benefit, such as cash, and one qualified non-taxable benefit. This allows participants to tailor their benefits package to their needs. Employers also benefit from these plans by realizing savings on payroll taxes due to the reduction in employees’ taxable wages.

Reporting on Your W2

Contributions and benefits from a cafeteria plan appear on an employee’s W2 form, primarily in Box 12, which reports compensation and benefits not included in Box 1 taxable wages. Each entry in Box 12 is identified by a specific code indicating the nature of the amount. For instance, pre-tax contributions to a Health Savings Account (HSA) are reported with Code W in Box 12.

The cost of employer-sponsored health coverage is reported with Code DD in Box 12. This code provides employees with the total cost of their health coverage, including both employer and employee contributions. While health Flexible Spending Accounts (FSAs) generally are not reported on the W2 for employee salary reduction amounts, dependent care FSAs are reported in Box 10, labeled “Dependent Care Benefits.”

Pre-tax contributions made through a cafeteria plan directly influence the amounts reported in several boxes on the W2. These contributions typically reduce the amount shown in Box 1 (Wages, tips, other compensation). For most qualified benefits within a cafeteria plan, these pre-tax contributions also reduce the amounts in Box 3 (Social Security wages) and Box 5 (Medicare wages). However, some contributions, like those to an HSA (Code W), are excluded from Box 1 but are also excluded from Boxes 3 and 5.

Tax Treatment

Cafeteria plan contributions provide financial advantages by reducing taxable income. Contributions made on a pre-tax basis lower an employee’s gross income, directly impacting the amount reported in Box 1 of the W2. This reduction in taxable income results in a lower overall federal income tax liability.

Beyond federal income tax, most pre-tax cafeteria plan contributions also provide savings on Social Security and Medicare taxes. These contributions are generally not subject to FICA. This reduction is reflected in lower amounts in Box 3 (Social Security wages) and Box 5 (Medicare wages). However, certain benefits, such as the value of group-term life insurance coverage exceeding $50,000, may still be subject to Social Security and Medicare taxes, even if offered through a cafeteria plan.

The tax savings benefit for the employee can be significant, as they pay for eligible expenses with pre-tax money. For example, for every dollar contributed to a cafeteria plan for qualified benefits, employees can typically save between 20% and 40% in combined federal, state, and local taxes. This mechanism enhances an employee’s take-home pay and provides a direct financial incentive to participate in employer-sponsored benefit programs.