Employees enrolled in a Section 125 plan, such as Dental, Medical, or the Wellness Plan, will notice adjustments on their annual W-2 tax form that reflect their pre-tax benefits. These adjustments affect taxable wages and payroll reporting, helping to maximize tax savings for employees.
What to Expect on a W-2
- Box 1 – Taxable Wages: This box shows earnings after pre-tax deductions are applied. Since pre-tax benefits reduce taxable wages, employees will see a lower amount here compared to their gross earnings.
- Box 3 & Box 5 – Social Security & Medicare Wages: Section 125 deductions also lower taxable wages for Social Security and Medicare taxes. This results in slightly lower contributions to these programs, though the long-term impact is minimal, as benefits are based on a 35-year average of earnings.
- Box 12 (Code DD & Other Designations): Some employers may report the total cost of employer-sponsored health benefits here for informational purposes. This does not affect taxable income but provides employees with a record of their benefit value.
What This Means for Employees on the Wellness Plan
Because the Wellness Plan is a pre-tax benefit, employees keep more of their paycheck while still receiving valuable healthcare benefits, such as $0 copays, free telemedicine, and prescription savings. The reduction in taxable wages means employees pay less in federal, Social Security, and Medicare taxes, resulting in greater overall savings.
Do Employees Owe More in Taxes?
No. Just like other traditional pre-tax health benefits, the Wellness Plan lowers taxable wages, which reduces tax liability overall. Employees will not owe additional taxes at the end of the year due to participation in the plan. If they have questions about their specific tax situation, they can review their W-2 with a tax preparer to better understand their personal tax situation.