What Is Excluded From Federal Taxable Wages?

Several categories of pay and benefits are excluded from federal taxable wages, meaning they never show up in Box 1 of your W-2 and never get taxed as income. The main ones are pre-tax retirement contributions, employer-paid health coverage and HSA contributions, certain Section 132 fringe benefits, accountable-plan expense reimbursements, and specific assistance programs covering education, dependent care, and adoption. Some of these also escape Social Security and Medicare tax, which is why your Box 1, Box 3, and Box 5 wages often show three different numbers.

Pre-Tax Retirement Contributions

Traditional contributions to a 401(k), 403(b), governmental 457 plan, or the federal Thrift Savings Plan come off the top of your taxable wages. For 2026, the elective deferral limit is $24,500. Workers 50 and older can add $8,000 in catch-up contributions for a total of $32,500. A SECURE 2.0 provision lets workers aged 60 through 63 use a higher catch-up of $11,250, bringing their combined maximum to $35,750.¹

One boundary worth flagging: Roth 401(k) and Roth 403(b) contributions do not reduce your taxable wages. The money goes in after tax and is included in Box 1 just like cash pay.² The tax break shows up later, when qualified withdrawals come out tax-free.

Employer Health Coverage and Cafeteria Plan Elections

The value of your employer’s contribution toward medical, dental, and vision insurance is excluded from your gross income entirely.³ Your own share of the premium is also excluded if you pay it through pre-tax payroll deductions under a Section 125 cafeteria plan. Cafeteria plan elections reduce both income tax and FICA, so a dollar run through the plan saves more tax than a dollar of ordinary deduction.

Payments you receive from an employer accident or health plan to reimburse medical expenses are also excluded.⁴ That is the rule keeping health reimbursement arrangement payouts off your W-2.

Health Savings Accounts

Employer HSA contributions are excluded from wages when you carry a high-deductible health plan. For 2026, total HSA contributions (employer plus employee) cannot exceed $4,400 for self-only coverage or $8,750 for family coverage.⁵ The employer’s portion within those caps stays out of taxable wages and out of FICA.³

Group-Term Life Insurance Up to $50,000

Your employer can provide up to $50,000 of group-term life insurance without adding anything to your taxable wages.⁶ Coverage above that threshold is different: the cost of the excess is calculated from an IRS table, added to your income as imputed income, and subject to Social Security and Medicare tax. A small unexplained amount labeled imputed income on your pay stub is almost always this.

Section 132 Fringe Benefits

The tax code excludes several categories of workplace perks from wages. These are the ones defined under Section 132:

No-additional-cost services: A benefit provided using capacity that would otherwise go unused, with no meaningful extra cost to the employer. The classic example is an airline employee flying standby.
Qualified employee discounts: Discounts on goods your employer sells, capped at the employer’s gross profit percentage. For services, the cap is 20% off the customer price. Anything past those limits is taxable.⁷
Working condition fringe benefits: Property or services used for work that you could have deducted as a business expense had you paid yourself, such as company vehicles used for business travel or job-related training.
De minimis fringe benefits: Items too small to reasonably track: occasional office snacks, a holiday party, a low-value gift. Cash and gift cards never qualify, because cash is easy to account for and counts as wages. A narrow exception exists for occasional meal money or transit fare when an employee actually works overtime.⁸

Qualified Transportation Benefits

Employer-provided transit passes, vanpool costs, and qualified parking each have monthly exclusion limits. For 2026, the cap is $340 per month for transit and commuter highway vehicle benefits and a separate $340 per month for qualified parking.⁹ Combined, that is up to $8,160 in pre-tax commuter benefits over a full year. Anything above the monthly cap is added to taxable wages.

Accountable-Plan Expense Reimbursements

Reimbursements for travel, supplies, or other work costs stay off your W-2 only when they come through an accountable plan. The plan has three requirements:

Business connection: The expense relates directly to your work.
Adequate documentation: You provide receipts, dates, amounts, and business purpose within a reasonable time.
Return of excess: If you received more than you spent, you return the difference within a reasonable time.

Fail any one of those and the entire reimbursement becomes taxable wages. Flat per diem allowances for meals or mileage work as long as they do not exceed IRS-approved rates and the employee still substantiates the time, place, and business purpose of the trip. Anything paid under a non-accountable plan gets added to your W-2.

Moving Expenses (No Longer Excluded)

Employer-paid moving costs used to be excluded, but that exclusion was suspended for civilian employees starting in 2018, and a 2025 amendment made the suspension permanent.¹⁰ Any moving reimbursement today is taxable income on your W-2. Active-duty military moving under official orders remain the only group still receiving the exclusion.

Educational Assistance

An employer educational assistance program can provide up to $5,250 per year in tax-free benefits covering tuition, fees, books, and supplies.¹¹ The education does not have to relate to your current job. Anything over $5,250 in a calendar year is added to taxable wages unless it independently qualifies as a working condition fringe benefit because it is job-related.

Since 2020, the exclusion has also covered employer payments toward an employee’s student loan principal and interest. That provision was set to expire at the end of 2025, but the One Big Beautiful Bill Act made it permanent for payments after December 31, 2025.¹¹ Student loan payments count toward the same $5,250 annual cap.

Dependent Care Assistance

Contributions to a dependent care assistance program or dependent care FSA are excluded from taxable wages up to an annual limit. Effective January 1, 2026, that limit rose to $7,500 per household, or $3,750 for married taxpayers filing separately.¹² The previous caps were $5,000 and $2,500.

The care has to be for a qualifying person, usually a child under 13, and must be necessary for you and your spouse to work or actively look for work. Amounts above the annual limit are added back to taxable wages.

Adoption Assistance

Employer adoption assistance has its own exclusion. For 2026, you can exclude up to $17,670 in qualified adoption expenses paid by your employer. The exclusion begins phasing out once modified adjusted gross income exceeds $265,080 and disappears completely at $305,080.¹³ Adoptions of children with special needs qualify for the full exclusion amount regardless of actual expenses incurred.¹⁴

How Exclusions Show Up on Your W-2

The exclusions do not all work the same way. Pre-tax retirement contributions and Section 125 cafeteria plan elections reduce wages for both income tax and FICA, so you save on multiple taxes at once. Group-term life insurance up to $50,000 reduces income tax but is still reported in specific W-2 boxes for informational purposes. That is why Box 1 (federal taxable wages), Box 3 (Social Security wages), and Box 5 (Medicare wages) can each show different totals for the same year of work.

1
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
2
Internal Revenue Service. Retirement Plans FAQs on Designated Roth Accounts
3
Office of the Law Revision Counsel. 26 USC 106 – Contributions by Employer to Accident and Health Plans
4
Office of the Law Revision Counsel. 26 USC 105 – Amounts Received Under Accident and Health Plans
5
Internal Revenue Service. IRS Notice 2026-05 – HSA Contribution Limits
6
Office of the Law Revision Counsel. 26 USC 79 – Group-Term Life Insurance Purchased for Employees
7
Office of the Law Revision Counsel. 26 USC 132 – Certain Fringe Benefits
8
Internal Revenue Service. De Minimis Fringe Benefits
9
Internal Revenue Service. Publication 15-B (2026), Employer’s Tax Guide to Fringe Benefits
10
Office of the Law Revision Counsel. 26 USC 217 – Moving Expenses
11
Office of the Law Revision Counsel. 26 USC 127 – Educational Assistance Programs
12
Office of the Law Revision Counsel. 26 USC 129 – Dependent Care Assistance Programs
13
Internal Revenue Service. Revenue Procedure 2025-32 – Inflation Adjusted Items for 2026
14
Office of the Law Revision Counsel. 26 USC 137 – Adoption Assistance Programs