Section 125 Cafeteria Plan on Your Paycheck, Explained

Disclaimer: This article is for educational purposes only and is not tax, legal, or financial advice. Tax rules change periodically, always check current IRS/state guidance or consult a professional.

What “Cafe 125” or “Section 125” on Your Paycheck Actually Means

You checked your pay stub and spotted a line labeled “Cafe 125.” Or maybe it showed up on your W-2 in Box 14 as “Sec 125” or “Less Other Cafe 125.” For a lot of people, the first reaction is the same: is this a mistake, or some hidden charge?

It is neither. “Cafe 125” refers to Section 125 of the Internal Revenue Code. That section of tax law lets employers offer a menu of pre-tax benefits, which is where the “cafeteria” nickname comes from. The line on your stub is not money being taken from you. It is money you chose to spend on benefits before any tax was calculated.

You will see the label written a few ways: S125, Sec 125, Cafe 125, or “Less Other Cafe 125.” They all point to the same thing. Your employer routed part of your pay into a qualified benefit, and that part skipped the usual taxes.

So this is a tax break working in your favor, not a deduction that costs you anything extra. The rest of this article walks through how the mechanism works and why it changes the numbers on your W-2.

How a Cafeteria Plan Works: Trading Taxable Wages for Pre-Tax Benefits

Think of it like a lunch counter. Your employer sets out a tray of benefit options, and you pick the ones you want. Instead of taking that value as taxable cash in your paycheck, you swap it for a qualified benefit the IRS lets you buy with untaxed dollars.

The technical term for this swap is a salary reduction. You agree to lower your taxable wages by, say, $200 a month, and that $200 goes straight to your health premium or your FSA. Because the money never counts as taxable wages, it never shows up as income for tax purposes.

And here is what actually saves you money. You were going to pay for that health premium anyway. The cafeteria plan just changes the order of operations: benefit first, taxes second, instead of taxes first and benefit second. That reordering is the entire savings.

For a broader look at how pre-tax elections shrink your taxable pay, our guide to pre-tax vs. post-tax deductions breaks down the full category. This article stays focused on the Section 125 wrapper itself.

Which Benefits Run Through Section 125 (and Which Do Not)

Not every deduction on your stub is a Section 125 benefit. The cafeteria plan covers a specific list of qualified benefits, and it helps to know what belongs and what does not.

Benefits that typically run through Section 125:

Health, dental, and vision premiums. When only premiums go through the plan, it is called a premium-only plan (POP). This is the most common Section 125 benefit by far.
Health FSA. A flexible spending account for medical costs. The 2026 employee contribution limit is $3,400, with a carryover of up to $680.
Dependent care FSA (DCAP). Used for childcare and eligible dependent care. The 2026 limit jumped to $7,500 per household ($3,750 if married filing separately), the first permanent increase since 1986.
HSA contributions made through payroll. Routing HSA money through the cafeteria plan is what lets it dodge FICA. The 2026 HSA limits are $4,400 self-only and $8,750 family.
Group-term life insurance (coverage up to $50,000) and adoption assistance.

Benefits that do not run through Section 125:

401(k), 403(b), and 457(b) contributions. These are pre-tax for income tax, but they live under different code sections and still pay FICA.
Most commuter benefits. Transit and parking pre-tax deductions fall under Section 132, not 125. See our note on commuter benefits and your paycheck for that distinction.
Long-term care insurance.

If you want to go deeper on any single benefit, we have dedicated guides on how HSAs and FSAs affect your paycheck, dependent care FSA savings, and pre-tax health insurance premiums.

Why Section 125 Cuts Your Income Tax AND Your FICA

Most explainers skip this part, and it is the whole reason a cafeteria plan is worth paying attention to.

A Section 125 contribution is excluded from your wages for two kinds of tax: federal income tax and FICA. FICA is the 7.65% payroll tax that funds Social Security (6.2%) and Medicare (1.45%). Skipping both is a double break. If you want the full mechanics of the payroll tax itself, our FICA taxes explained guide covers the 2026 rates and the $184,500 Social Security wage base.

Compare that to a traditional 401(k). A 401(k) contribution lowers your federal income tax, but Social Security and Medicare are still withheld on it. That is why your retirement savings show up in Box 3 and Box 5 of your W-2, while your Section 125 benefits do not. Our breakdown of how a 401(k) affects your paycheck walks through that difference.

Here is a worked example. Say you earn $60,000 and put $3,000 a year through your cafeteria plan for health premiums. Assume a 12% federal marginal rate.

Income tax saved: $3,000 x 12% = $360
FICA saved: $3,000 x 7.65% = $229.50
Combined savings: roughly $589.50 a year

Run that same $3,000 through a traditional 401(k) instead and you would save the $360 in income tax but none of the $229.50 in FICA. That extra FICA break is the cafeteria plan’s edge.

How Section 125 Explains the Gap Between Your Salary and W-2 Box 1

Every January, someone looks at their W-2 and asks why Box 1 is smaller than the salary on their offer letter. Section 125 is usually a big part of the answer.

Because your cafeteria plan contributions come out before taxes, they are subtracted before your wages are printed on the W-2. That reduction hits three boxes:

Box 1 (federal taxable wages)
Box 3 (Social Security wages)
Box 5 (Medicare wages)

Your employer may also report the total in Box 14, often labeled “Cafe 125” or “Sec 125,” as an informational note. Box 14 is not something you enter separately on your return.

That last part matters. You do not owe anything on the Section 125 amount, and you do not need to add it back, subtract it, or do anything special at tax time. The reduction is already baked into the wages your W-2 reports. Our guides on how to read your W-2 and how to read your pay stub show where these numbers land.

About that “Less Other Cafe 125” wording: if you never knowingly signed up for a plan, it usually means your health premium was taken pre-tax through a default premium-only plan. Many employers set this up automatically when you accept coverage. It is not an error, just the standard way premiums are handled.

Section 125 is a good deal, but it is fair to name the one catch. Because the plan lowers your Box 3 Social Security wages, it also lowers the earnings that Social Security uses to figure your future benefit.

Social Security calculates your benefit from your highest 35 years of indexed earnings. Shaving a few thousand dollars off a handful of those years nudges the average down, but the effect is small for most workers. The immediate income tax and FICA savings almost always outweigh the tiny long-term benefit reduction.

There is a ceiling on this concern too. In 2026, Social Security tax only applies to the first $184,500 of wages (the wage base). If your pay is above that cap, reducing your Social Security wages through Section 125 has no effect on your Social Security record at all, because you were already past the taxable limit.

Want to see the numbers on your own pay? Pay44 is a free paycheck calculator with a pre-tax deduction field that models Section 125 contributions directly, so you can watch your take-home pay and your FICA line change as you adjust them. You can also model a specific benefit with the health insurance premium calculator, the HSA contribution calculator, or the FICA tax calculator. Prefer it on your phone? Download the Pay44 app.

Frequently Asked Questions

What does "Cafe 125" mean on my pay stub or W-2?

"Cafe 125" is short for Section 125 of the Internal Revenue Code, the law that governs cafeteria benefit plans. It is not a charge or a fee. It marks the portion of your pay you elected to route into pre-tax benefits like health insurance premiums, an FSA, or an HSA. You may also see it written as Sec 125, S125, or "Less Other Cafe 125."

Is a Section 125 deduction taking money out of my pocket?

No. A Section 125 line does not take extra money from you. It shows the money you chose to spend on benefits before taxes were applied. You would have paid for those benefits anyway, but running them through the cafeteria plan means you pay for them with pre-tax dollars, which lowers your tax bill.

Does a cafeteria plan lower my federal income tax and FICA taxes?

Yes. Section 125 contributions are excluded from wages for federal income tax and for FICA (Social Security and Medicare). That double break is what sets a cafeteria plan apart from a traditional 401(k), which lowers income tax but still pays the full 7.65% FICA. Most states also honor the income tax exclusion.

Why is my W-2 Box 1 lower than my annual salary?

Section 125 contributions are subtracted from your wages before your W-2 is printed. Your Box 1 (federal wages), Box 3 (Social Security wages), and Box 5 (Medicare wages) all show your salary minus those pre-tax benefits. The gap between your full salary and Box 1 is usually your cafeteria plan and pre-tax retirement contributions combined.

What benefits can go through a Section 125 cafeteria plan?

Common Section 125 benefits include employer health, dental, and vision premiums (a premium-only plan), a health FSA, a dependent care FSA, HSA contributions made through payroll, group-term life insurance, and adoption assistance. Not eligible: 401(k) contributions, most commuter benefits (those fall under Section 132), and long-term care insurance.

What is the difference between a Section 125 deduction and a 401(k) deduction?

A Section 125 deduction escapes both federal income tax and FICA, so you save the full 7.65% payroll tax plus income tax. A traditional 401(k) deduction escapes federal income tax but is still subject to FICA, so Social Security and Medicare are withheld on it. That is why your Social Security and Medicare wages on your W-2 include 401(k) money but not Section 125 money.

What does "Less Other Cafe 125" mean if I never signed up for a plan?

"Less Other Cafe 125" usually means your employer-sponsored health insurance premium was taken pre-tax through a default premium-only plan. Many employers enroll you automatically when you accept coverage, so you may not remember opting in. The wording just means those premiums were subtracted before taxes. If the amount looks wrong, ask your payroll or HR department for a breakdown.

Will Section 125 pre-tax contributions reduce my future Social Security benefits?

Slightly, but for most workers the effect is small. Because Section 125 lowers your Social Security wages (Box 3), it also lowers the earnings record used to calculate your future benefit. Social Security averages your highest 35 years of indexed earnings, so a modest reduction in a few years has a minor impact. For most people the immediate tax savings outweigh it.