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125 Plan Eligibility


Guest Scott Fielding
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Start with Proposed treasury Regulations 1.125-1 Q&A 4 which will refer you to IRC section 414 (B), © and (m). It also refers to IRC 401© regarding self-employed individuals.

Then you might want to look at Treas. Regs 105 and 106.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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I know that you feel that the above references dont seem on-point, and I agree. I actually quoted you from the IRS CPE Manual on Cafeteria Plans, and that is essentially how they cite it. However, one of their top 2 experts explained the short cite and referred me to underlying reasoning. This is explained in Revenue Ruling 91-26 which is available from www.taxlinks.com. You might also look at the related 88-76.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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For whatever it's worth, you might look at IRC Section 1372. I don't have it in front of me, but it generally provides that more than 2% shareholders in an S Corp are treated like partners for fringe benefit purposes. Then, you go back to the prop. 125 regulations which state that, in general, a cafeteria plan must be for employees. Pension plans have IRC Section 401© which states that partners and self-employed individuals are treated as employees. But, there is no similar provision for IRC Section 125. So, the bottom line is that more than 2% shareholders in an S Corp aren't employees and therefore can't participate. Also, due to stock attribution, there may be others (e.g., spouses) who are also ineligible.

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