What Is S125med? FSA Limits, Carryover, and Election Changes

If you see “S125,” “S125med,” “Section 125,” or “Café 125” listed as a pre-tax deduction on your pay stub, it’s money your employer is routing out of your paycheck under a Section 125 cafeteria plan before federal income tax and FICA are calculated. The S125 pre-tax health deduction almost always represents one of two things: your share of employer-sponsored health, dental, or vision premiums, or your election into a Health Flexible Spending Account for out-of-pocket medical costs.¹ Because the money never counts as taxable wages, you keep more of it than you would if the same expense came out of your check after taxes.

What the Deduction Does to Your Paycheck

A Section 125 plan uses two main vehicles. The Premium Only Plan, or POP, lets you pay your share of employer-sponsored health, dental, and vision insurance premiums with pre-tax dollars. If your employer covers part of the premium and you owe the rest, the POP ensures your portion is deducted before taxes hit your paycheck. The Health FSA covers out-of-pocket medical costs that insurance doesn’t pay, such as copays, deductibles, and prescriptions. You elect a fixed dollar amount at the start of the plan year, and it’s split into equal payroll deductions across the year.

Salary reduction contributions to a cafeteria plan are generally exempt from FICA and federal unemployment tax, which means your employer also pays less in matching payroll taxes on every dollar you redirect toward benefits.² For someone earning $60,000 who contributes $3,000 to a Health FSA, the combined federal income tax and FICA savings can easily reach $900 or more depending on the marginal bracket. Most states honor the same pre-tax treatment, but a few don’t fully conform, so check whether your state taxes these contributions.

The deduction shows up in a specific place on your pay records. Because the amount is excluded from taxable wages, your Box 1 wages on Form W-2 are already reduced by whatever ran through the S125 line during the year. You do not deduct it again on your tax return. That’s the whole benefit: the money was never taxed to begin with.

Health FSA Limits and What Counts

For plan years beginning in 2026, the maximum salary reduction contribution to a Health FSA is $3,400.³ The cap applies per employee, so a spouse working for a different employer can elect their own $3,400 in a separate account. Some employers add a nonelective contribution on top of the employee election, though that’s less common.

One feature makes the FSA especially useful early in the year: the entire elected amount is available on day one. If you elect $3,400 and need $2,000 of dental work in January, you can use the full amount immediately even though only a fraction has been deducted from your paychecks. The employer carries the risk of that arrangement, and cannot recover the shortfall if you leave mid-year with a negative balance.⁴

FSA funds can only reimburse expenses that qualify as “medical care” under the tax code, meaning diagnosis, treatment, and prevention of disease.⁵ In everyday terms that covers doctor and specialist copays, prescription medications, dental work including fillings and orthodontics, eyeglasses, contacts, and eye exams. It also covers over-the-counter medications like pain relievers, allergy medicine, and cold remedies, along with menstrual care products such as tampons, pads, and cups. The CARES Act permanently expanded FSA-eligible expenses to include over-the-counter medications without a prescription and menstrual products.⁶

Health insurance premiums are not eligible through the Health FSA, since those run through the Premium Only Plan side. Cosmetic procedures and general wellness items like daily vitamins don’t qualify either.

The IRS also requires independent third-party documentation for every reimbursement. Self-certification does not count. You need a receipt from the provider or an Explanation of Benefits from your insurer showing the date of service, the provider’s name, and the amount you owe. If you swipe an FSA debit card for a transaction the plan can’t automatically match, you’ll get a request for backup documentation. Ignoring it has consequences: unsubstantiated amounts get added back to your taxable income.⁷

Use-It-or-Lose-It, Carryover, and Grace Period

Money left in a Health FSA after the plan year generally goes back to the employer.⁸ That makes your election a real commitment. Overestimate and you lose money; underestimate and you miss tax savings. Reviewing last year’s out-of-pocket costs and planned procedures is the usual way to land on a workable number.

The IRS lets employers add one of two cushions, but not both:

Carryover. A limited amount of unused funds rolls into the next plan year. For the 2026 plan year the maximum carryover is $680. Anything above that is forfeited. The carryover does not reduce the following year’s contribution limit, so you could carry over $680 and still elect up to $3,400 in new contributions.³
Grace period. Up to two and a half extra months after the plan year ends to incur new eligible expenses and pay for them with the prior year’s leftover balance. For a calendar-year plan that runs through March 15. Whatever remains after the grace period is forfeited.⁴

Your employer picks one, the other, or neither. Check your Summary Plan Description to see which applies. Separately, most plans give you a run-out period of roughly 90 days after year-end to submit claims for expenses you already incurred during the plan year. That’s about getting reimbursed for old receipts, not about spending down a balance on new purchases.

Changing Your Election During the Year

Once you lock in your Section 125 election, it stays in place for the whole plan year. The IRS enforces this irrevocability rule to prevent people from funding an account only when a big expense is about to hit.⁹

The exception is a qualifying change in status. Treasury regulations recognize specific life events that let you change mid-year, provided the change matches the event:

Change in marital status: marriage, divorce, legal separation, annulment, or death of a spouse
Change in number of dependents: birth, adoption, or placement for adoption
Change in employment status for you, your spouse, or a dependent: starting or stopping work, switching from full-time to part-time, or taking unpaid leave
Dependent eligibility change: a child ages out of coverage or loses student status
Change in residence that affects your access to a provider network

The election change has to fit the event logically. A new baby justifies adding the child to your health plan and raising your FSA election; it does not justify dropping dental coverage. Most plans require you to notify the administrator within a short window after the event, commonly 30 to 60 days, though the exact deadline sits in the plan document rather than in federal regulation. Miss the window and you’re stuck with your original election until open enrollment.

What Happens If You Leave Your Job

Termination creates an immediate split for your Health FSA. If you’ve spent less than you’ve contributed when you leave, the unspent balance is forfeited unless you elect COBRA continuation for the FSA. Employers with 20 or more employees are generally required to offer COBRA, which includes the Health FSA when the account is underspent.¹⁰ COBRA on an FSA is rarely worth it: you’d pay the remaining annual election (prorated monthly) plus a 2% administrative fee, all with after-tax dollars. It only makes sense when your remaining balance meaningfully exceeds those COBRA premiums and you have upcoming medical expenses to drain the account.

If you’ve already spent more than you’ve contributed when you leave, you keep the reimbursements. The employer can’t claw back the difference because of the uniform coverage rule that makes the full election available from day one.⁴

Who Cannot Use a Section 125 Plan

Section 125 defines a cafeteria plan as one where “all participants are employees.”¹ That single word excludes several groups that often assume they qualify:

Sole proprietors and other self-employed individuals
Partners in a general or limited partnership
S corporation shareholders who own more than 2% of the company’s stock

These individuals count as self-employed under the tax code, not employees, even if they draw a salary. A 3% S corp shareholder who works full-time cannot participate in the company’s Section 125 plan, despite appearing on the payroll. If that’s you, look at other tax-advantaged options such as an HSA (paired with a qualifying high-deductible plan) or the self-employed health insurance deduction on your personal return.

A Note on Pairing With an HSA

If you’re enrolled in a high-deductible health plan and want to contribute to a Health Savings Account, a standard Health FSA disqualifies you. An HSA-eligible individual cannot be covered by any other health plan that pays for expenses before the HDHP deductible is met, and a general-purpose Health FSA does exactly that.¹¹ The workaround is a limited-purpose FSA, which restricts reimbursements to dental and vision expenses only and preserves your HSA eligibility.⁸ Confirm which type your employer offers before enrolling, because picking the wrong one can wipe out your HSA contribution room for the year.

1
Office of the Law Revision Counsel. 26 USC 125 Cafeteria Plans
2
Internal Revenue Service. FAQs for Government Entities Regarding Cafeteria Plans
3
Internal Revenue Service. Revenue Procedure 2025-32
4
Internal Revenue Service. Modification of Use-or-Lose Rule for Health Flexible Spending Arrangements and Clarification Regarding 2013-2014 Non-Calendar Year Salary Reduction Elections Under Section 125 Cafeteria Plans Notice 2013-71
5
Office of the Law Revision Counsel. 26 USC 213 Medical, Dental, Etc., Expenses
6
Internal Revenue Service. IRS Outlines Changes to Health Care Spending Available Under CARES Act
7
Internal Revenue Service. Notice 2006-69
8
Internal Revenue Service. Publication 969 (2025), Health Savings Accounts and Other Tax-Favored Health Plans
9
GovInfo. Treasury Regulation 1.125-4 Permitted Election Changes
10
U.S. Department of Labor. Continuation of Health Coverage (COBRA)
11
Office of the Law Revision Counsel. 26 U.S. Code 223 – Health Savings Accounts