Cafeteria Plan 125: What It Is, How It Works and What It Does to Your Pay
A cafeteria plan, also called a Section 125 plan, is a written employer plan that lets employees choose between cash and qualified benefits such as health premiums, FSAs and dependent care. This guide explains the three plan types, the 7.65% payroll tax effect with a worked paycheck example, the 2026 limits, why elections are locked for the year and how to ask HR what your plan includes.
- A cafeteria plan must be a written plan that lets employees choose between at least 2 benefits, one of which is cash, and every participant must be an employee (26 U.S.C. 125(d), 2026).
- Social Security and Medicare tax is 7.65% for the employee and 7.65% for the employer, and qualified benefits paid through a cafeteria plan are exempt from both (IRS Tax Topic 751 and Publication 15-B, 2026).
- For plan years beginning in 2026, a health FSA is capped at $3,400 of salary reduction and the dependent care exclusion is up to $7,500 (IRS Publication 15-B, 2026).
- For 2026 a highly compensated employee is someone paid more than $160,000 the year before, and testing can make their benefits taxable (IRS Publication 15-B, 2026).
- A 2% S corporation shareholder is not treated as an employee for cafeteria plan purposes (IRS Publication 15-B, 2026).
You are looking at a paystub or a benefits screen that says "cafeteria 125" and you want to know what you are paying for. A cafeteria plan 125 is how your employer lets you pay for benefits before tax, and it is the reason your taxable pay is lower than your gross pay. This guide explains the three plan types, shows the math on a real paycheck, and gives you an email to send HR.
Reviewed by a licensed benefits professional. Last reviewed: October 8, 2026.
What is a cafeteria plan 125?
A cafeteria plan 125 is a written employer plan that lets employees choose among cash and qualified benefits on a pre-tax basis. The "125" is Section 125 of the Internal Revenue Code.
The law is specific. Section 125(d)(1) defines a cafeteria plan as a written plan under which all participants are employees and the participants may choose among 2 or more benefits consisting of cash and qualified benefits (26 U.S.C. 125, 2026). IRS Publication 15-B (2026) says a cafeteria plan "provides participants an opportunity to receive qualified benefits on a pre-tax basis."
The name comes from the menu idea. You pick from a list, like a cafeteria, instead of getting one fixed package. Your paystub may show the plan as "cafeteria 125," "Sec 125," "S125" or "pre-tax medical."
What can a cafeteria plan 125 pay for?
A cafeteria plan 125 can pay for qualified benefits only. IRS Publication 15-B (2026) lists accident and health benefits, adoption assistance, dependent care assistance, group-term life insurance and health savings account contributions as qualified benefits.
The same publication says a cafeteria plan cannot include benefits such as athletic facilities, educational assistance, meals and working condition benefits. Your employer picks which qualified benefits to offer, so your plan may have only some of the list.
| Benefit | What it is | 2026 limit |
|---|---|---|
| Health premiums | Your share of medical, dental or vision premiums | No dollar cap |
| Health FSA | Pre-tax account for medical costs | $3,400 salary reduction |
| Dependent care | Pre-tax account for child or adult care | Up to $7,500, or $3,750 if married filing separately |
| HSA contributions | Pre-tax deposits to a health savings account | Set separately by the IRS |
Source: IRS Publication 15-B (2026). Ask HR which of these your employer offers.
What are the three types of cafeteria plan?
The three common types are a premium-only plan, a flexible spending account plan and a full cafeteria plan. They differ in how many benefits you can choose from.
A premium-only plan lets you pay your share of health premiums before tax and nothing else. A flexible spending account plan adds a health FSA, a dependent care account or both. A full plan offers a broad menu, sometimes with cash as one option. Your plan document names the type, so read it before you assume.
How does a cafeteria plan 125 save you money?
A cafeteria plan 125 saves you money because the amount you pay for benefits is taken out of your pay before income tax and payroll tax apply. The payroll tax piece is 7.65%, made up of 6.2% Social Security and 1.45% Medicare (IRS Tax Topic 751, 2026).
Here is a worked example. The numbers are hypothetical, so you can follow the math. You earn $52,000 a year and pay $200 a month toward your health premium through the plan. You assume a 12% federal income tax rate.
| Item | Without the plan | With the plan |
|---|---|---|
| Yearly pay | $52,000 | $52,000 |
| Premium paid before tax | $0 | $2,400 |
| Pay that is taxed | $52,000 | $49,600 |
| Social Security and Medicare tax saved (7.65% of $2,400) | $0 | $183.60 |
| Federal income tax saved (12% of $2,400) | $0 | $288.00 |
| Total tax saved by you | $0 | $471.60 |
Your employer saves the same 7.65% on its side, $183.60 in this example, because qualified benefits through the plan are exempt from Social Security and Medicare tax (IRS Publication 15-B, 2026). The 12% rate is an assumption. Your rate may differ, and your state may add its own effect.
Your W-2 shows the effect. Taxable wages come out lower than gross pay, and many employers print a code or note about the plan in Box 14. Benecor's guide to W-2 Box 14 and Section 125 explains how to read it.
Why can't you change your cafeteria plan 125 election whenever you want?
You cannot change a cafeteria plan 125 election whenever you want because Section 125 elections are generally locked for the plan year. A change mid-year is allowed only after a specific IRS-recognized event.
The rule comes from 26 CFR 1.125-4 and is summarized in IRS Publication 15-B (2026). Events that plans commonly recognize include marriage, divorce, birth or adoption of a child, a change in employment status and loss of other coverage. Your plan document lists which events it recognizes, and your plan sets a short window to ask. Benecor's qualifying life events guide lists them.
Who is left out of a cafeteria plan 125?
Some owners and highly paid employees can be limited. IRS Publication 15-B (2026) says not to treat a 2% shareholder of an S corporation as an employee for cafeteria plan purposes, because that person is treated like a partner for fringe benefits.
Testing can also change your taxes. If a plan favors highly compensated employees, their taxable benefits may be added to their wages. For 2026 a highly compensated employee includes someone who received more than $160,000 in pay for the preceding year, and a key employee includes an officer with annual pay over $235,000 (IRS Publication 15-B, 2026). Most employees are not affected, but ask HR if you are near those lines.
What should you check on your paystub?
Check three lines on your paystub: the deduction name, the amount per pay period and whether it is marked pre-tax. A cafeteria plan 125 deduction should reduce your taxable wages, not just your take-home pay.
Follow these steps:
- Find the deduction. Look for "cafeteria 125," "Sec 125," "S125" or a benefit name with "pre-tax" next to it.
- Multiply by pay periods. A $92.31 deduction on 26 pay periods is $2,400 for the year.
- Compare to your elections. Match the total to what you chose at enrollment.
- Ask about anything you did not choose. A deduction you did not pick is worth a question to HR the same week.
Benecor's guide to the Section 125 cafeteria plan deduction on your paycheck covers the paystub in more detail.
How do you know if your employer's plan is set up right?
You know by asking for the written plan document and the summary plan description. Section 125(d) requires a written plan (26 U.S.C. 125, 2026), so HR should be able to give you a copy.
If your employer cannot produce one, the tax treatment of your benefits may be at risk, and that is a question for HR or a benefits professional. Benecor's Section 125 plan document guide explains what a plan document must contain. If you are the employer reading this, Summit Health Benefits explains the setup in its Section 125 cafeteria plan guide.
Sources: 26 U.S.C. 125, Cafeteria plans, via Cornell Legal Information Institute (2026); IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits (2026), qualified benefits, FSA and dependent care limits, nondiscrimination and 2% shareholders; IRS Tax Topic 751, Social Security and Medicare Withholding Rates (2026), 6.2% and 1.45% rates; 26 CFR 1.125-4, Permitted election changes (2026).
Frequently asked questions
- What is a cafeteria plan 125?
- A cafeteria plan 125 is a written employer plan that lets you choose between cash and qualified benefits before tax. The 125 refers to Section 125 of the Internal Revenue Code. Money you put toward those benefits is not subject to income tax or Social Security and Medicare tax.
- What does cafeteria 125 mean on my paystub?
- It means a deduction was taken under your employer's Section 125 plan, usually for a health, dental or vision premium or an FSA. The deduction should lower your taxable wages. Ask HR for the exact benefit behind the amount.
- Is a cafeteria plan the same as a Section 125 plan?
- Yes. Cafeteria plan, Section 125 plan and S125 plan all describe the same type of plan. They are named for Section 125 of the Internal Revenue Code.
- Can I opt out of a cafeteria plan 125?
- Usually only at open enrollment or after a qualifying event. Section 125 elections are generally locked for the plan year (26 CFR 1.125-4; IRS Publication 15-B, 2026). Your plan document lists the events your employer allows.
- Does a cafeteria plan 125 lower my taxes?
- Yes. It lowers your taxable wages, so you pay less income tax and less Social Security and Medicare tax. The payroll tax rate is 7.65% for the employee (IRS Tax Topic 751, 2026).
- What is the 2026 limit for a health FSA in a cafeteria plan?
- The limit is $3,400 of salary reduction for plan years beginning in 2026 (IRS Publication 15-B, 2026). Your employer can set a lower limit. The dependent care exclusion is separate, at up to $7,500 for 2026.
Continue reading
- Section 125 Cafeteria Plan: The Complete Employer Guide (2026) — Section 125 Plan
The authoritative reference. POP, FSA, DCAP, IRS-qualified benefits, FICA recapture math, W-2 reporting, and the five-step employer implementation flow.
- Section 125 plan rules — Section 125 Plan
Section 125 plan rules cover the written plan, who can join, locked elections, use-it-or-lose-it limits and nondiscrimination tests. See what employers must follow.
- Section 125 qualifying life events — Section 125 Plan
Section 125 qualifying life events let employees change benefit elections mid-year. See the IRS-approved events, the consistency rule and how to set the policy.
About the author
Muhammad Mudassir — Co-founder & Health Tech Sales Lead
Muhammad Mudassir, who goes by Moe, is a co-founder and health technology operator focused on Section 125 cafeteria plans and zero-cost employer benefits. He has spent years getting employers enrolled in compliant cafeteria plans, onboarding nationwide workforces into the WoW Health and UnifyWell ecosystems, and translating the mechanics of FICA recapture into language that HR, finance, and ownership can act on.