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BenefitsLink > Q&A Columns >

Q&A: Section 125 Plans

Answers are provided by Robyn Morris of R. C. Morris, Incorporated

S-Corp owner may not participate in a Section 125 Plan

(Posted January 9, 1998)

Question 48: I am my S Corp's owner and sole employee. Can I set up Section 125 plan for myself and provide health coverage and a flex spending account for my family and myself? I could not find anything in the IRC that says that I can't...

Answer: Unfortunately, you would have trouble in at least two areas. See the Section 125 Q&A Column's Question #6 for a description of why you, as the owner of an S-Corp, may not participate. Attribution rules (Internal Revenue Code Section 318) state that your spouse and children are also considered to be owners.

Even if your company were a C-Corp, if you are the only participant, you would fail the nondiscrimination testing. (I know that you have nobody to discriminate against, but IRS interprets the test result in its "absolute" form. That is, you would have 100% of the benefit, compared to 0% for the non-key employees.)

Important notice: Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner's situation. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of your situation. The laws, regulations and court decisions in this area change frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the laws, regulations or court decisions that occur after the date on which that Q&A is posted.
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