What Is the CAF125 Deduction on Your W2?
The CAF125 code on your W-2 reflects pre-tax benefit deductions. Learn how this arrangement reduces your overall taxable income and what it means for your return.
Finding an unfamiliar code like “CAF125” on your annual Form W-2 is a common point of confusion. This notation, however, represents a valuable, tax-saving employee benefit program. Understanding what this code means, the benefits it includes, and how it affects your income is straightforward once you break down the components.
Defining a Section 125 Cafeteria Plan
The label “CAF125” is shorthand for Section 125 of the Internal Revenue Code. A Section 125 plan, officially called a “cafeteria plan,” is an employer-sponsored benefit that allows employees to choose between receiving their full salary in cash or redirecting a portion of it to pay for certain qualified benefits. The name “cafeteria” is used because it allows employees to pick from a menu of benefit options.
The defining feature of a cafeteria plan is its tax treatment. When you enroll and have funds deducted for qualified benefits, that money is taken from your gross pay before most taxes are calculated. This is known as a “pre-tax deduction.” It means the contributions are not subject to federal income tax and, in most cases, are also exempt from FICA taxes, which fund Social Security and Medicare.
To be compliant, the plan must be formally documented in writing and must allow employees to choose between at least one taxable benefit, like cash, and at least one qualified, nontaxable benefit. These plans can be offered to employees, their spouses, and their dependents.
Common Benefits Included in a Cafeteria Plan
The dollar amount you see associated with the CAF125 code on your W-2 represents the total you contributed toward a variety of employer-offered benefits throughout the year. The most common benefits funded through a Section 125 plan are the premiums you pay for health, dental, and vision insurance coverage.
Beyond basic insurance premiums, cafeteria plans are frequently used to fund tax-advantaged savings accounts. Contributions to a Health Savings Account (HSA), which is paired with a high-deductible health plan, are a frequent component. Similarly, money can be directed into a Flexible Spending Account (FSA), which allows you to set aside pre-tax dollars for out-of-pocket healthcare costs. The IRS adjusts this limit for inflation, and for 2025, the employee contribution limit for a health FSA is $3,300.
Another prevalent benefit is a Dependent Care Assistance Program (DCAP), often structured as a Dependent Care FSA. This allows you to use pre-tax funds to pay for qualifying childcare or adult dependent care expenses, with an annual exclusion limit of $5,000 per household. Some plans may also include options for group-term life insurance, adoption assistance, and disability insurance.
How Cafeteria Plan Deductions Appear on Your W-2
When you receive your Form W-2, you will most likely find the notation “CAF125,” “SEC125,” or a similar variation in Box 14. Box 14 is a versatile field that employers use to report information that doesn’t have a dedicated box elsewhere on the form.
The effect of these deductions is reflected in other, more prominent boxes on your W-2. Because your cafeteria plan contributions are taken out of your pay before taxes, they directly reduce the amount of income reported to the government. The figure in Box 1 (Wages, tips, other compensation) will be lower by the amount of your CAF125 deductions.
While these deductions reduce your federal taxable income, some benefits are still subject to Social Security and Medicare (FICA) taxes. This means that while your wages in Box 1 are lower, the wages in Box 3 (Social Security) and Box 5 (Medicare) may not be reduced by the full amount of your cafeteria plan contributions. This is common for adoption assistance benefits. A similar rule applies to group-term life insurance; while the premiums for the first $50,000 of coverage are non-taxable, the calculated cost of any employer-provided coverage above that amount is subject to FICA taxes and will be included in the wages reported in Boxes 3 and 5. If you have dependent care benefits, that amount may also be reported separately in Box 10.
Impact on Your Taxable Income and Tax Return
The most significant consequence of participating in a cafeteria plan is the reduction of your overall taxable income. By paying for benefits with pre-tax dollars, you effectively lower the amount of your earnings that the federal and state governments can tax.
A point of frequent confusion is what an employee needs to do with this information when filing their taxes. You generally do not need to take any additional action on your tax return, such as Form 1040, to claim this deduction. The tax savings are already built into your W-2.
Therefore, when you or your tax preparer enters the wage information from your W-2 into your tax return, you are starting with a lower income figure. The Box 14 entry serves primarily as an informational item for your records, confirming the total amount of pre-tax benefits you received. You should not subtract this amount again, as that would be double-counting the deduction. The only exception is for dependent care benefits, which require you to file Form 2441 with your return.