A cafeteria plan allows you to pay for certain benefits with pretax money. Because your payments for the benefits are made with pretax income, you may not deduct them when you prepare your income tax return. You get a tax benefit; you just can't get it twice.
Pretax contributions are exempt from federal income tax and, in most cases, Social Security tax, Medicare tax, and state and local income taxes. Your pretax contributions lower your taxable wages, thereby giving you a tax break. Because the amount withheld for the benefit is not reported as income, you may not subtract it from your reported income.
Impact on W-2
If you participate in your employer’s group health plan, your employer must report the cost of specific coverage on your Form W-2 if it files 250 or more W-2s annually. This includes both your contributions and any amounts your employer paid toward the coverage. This information is for the federal government and has nothing to do with how you file your tax return. Simply report the amount listed in Box 1 of your W-2 as your taxable wages on your tax return. Before you file your return, confirm that the amount shown in Box 1 of your W-2 is correct by subtracting your pretax contributions from your entire gross wages for the year. The total should equal the amount in Box 1. If your W-2 is incorrect, ask your employer to issue a corrected one before you file your return.
The menu of benefits available through a cafeteria plan includes qualified health, life, disability and accident insurance; dependent care assistance, adoption assistance, health savings accounts, and 401(k) plans. If you paid for those benefits yourself outside of your employer’s cafeteria plan, they might be tax-deductible. For example, the IRS might allow you to claim a deduction for medical and dental expenses that you paid for with after-tax money for yourself, your spouse and your dependents. In such cases, as of the date of publication you can deduct only qualified medical expenses that exceed 7.5 percent of your annual adjusted gross income.
Consult your state's taxing authority for state and local income tax deductions on out-of-pocket expenses. For example, in Virginia, such deductions include expenses for child and dependent care, foster care, bone marrow screening, continuing teacher education, long-term health care premiums and mileage related to volunteer work for a charity.
- TurboTax: What Is Cafe 125 on a W-2 Tax Form?
- IRS: Topic 502 - Medical and Dental Expenses
- IRS: Form W-2 Informational Reporting of the Cost of Employer-Sponsored Group Health Plan Coverage
- Virginia Department of Taxation: Deductions
- IRS: FAQs for Government Entities Regarding Cafeteria Plans
- Appalachian State University: W-2 (FAQ)
- United Healthcare: W-2 Reporting
- Patriot Software: What Are Taxable Wages?
Grace Ferguson has been writing professionally since 2009. With 10 years of experience in employee benefits and payroll administration, Ferguson has written extensively on topics relating to employment and finance. A research writer as well, she has been published in The Sage Encyclopedia and Mission Bell Media.