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S Corp and 125 plan


Richard Anderson

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We don't handle section 125 plans, but a client asked us some questions and we would like to also know the answers.

1) Are there any special rules for shareholders of a S Corp that participate in a Section 125 plan?

2) Does the rule that more than 2% shareholders are taxed on their fringe benefits apply to 125 plans?

Thanks

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Guest potwasher

New rules for 125 this year. Owners are not prohiubited from benefiting from the plan. Information returns (5500) are suspended reroactively and your owner may now enjoy tax deductible insurances and such.

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I think we would all be very interested in the specific regulations or notices you are refering to. My legal guide (last updated June 2002) still says greater than 2% shareholders of S corp are not permitted to participate.

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Guest Joe Vasko

A question relating to Potwasher post: Is the wife of a 2% shareholder, who receives W-2 wages, eligible to participate in a Section 125 Caf Plan?

Thank You

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  • 2 weeks later...
Guest pauljose
Originally posted by Joe Vasko

A question relating to Potwasher post:  Is the wife of a 2% shareholder, who receives W-2 wages, eligible to participate in a Section 125 Caf Plan?

Thank You

Yes, she would be. The key is, 125 plans are employee benefits. A 2% shareholder in an S Corp. is considered self-employed, but if his spouse is an employee, (W-2), she can participate.

Paul

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Guest lschaab

You might want to check your resources. My resource indicates that stock attribution applies to the spouse and children of the 2% or more owner of a s-corp - therefore, they cannot participate.

Did something in the regulations change that I'm not aware of??

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Due to Code Section 318 ownership attribution rules (per Code Section 1372 which apply it to the definition of 2% shareholder), employed spouses, along with children, grandchildren and parents of greater than 2% shareholders of an S Corp cannot participate in that company's cafeteria plan.

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Okay Potwasher, the gauntlet has been laid down...................

I, like the others are firmly convinced that shareholder-Employees in an S-Corp CANNOT participate in a 125 plan and receive tax benefits.

Please produce a specific site - or we will wonder if you have been doing something else with pot rather than washing - such as smoking...........................:D

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Guest Joe Vasko

Lisa,

I have a unique situation in which a sole prop. sponsors the 125 Plan and his 5 sons (W-2 wages) participate in the 125 Plan. Since this is not an S-Corp, I have read that this is legal. Am I correct?

Also, the 5 sons each own 20% partners in an LLP. It turns out that these two company's would constitute a controlled group. If the LLP adopts the Plan as a participating employer, could the sons still participate in the 125 Plan?

Thanks, Joe

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Sole proprietorships are special animals, spouses and other members of the sole proprietor's family may participate as long as they are bona fide employees. That said, special care should be taken to make sure those family members are 1) bona fide employees and 2)could not be considered self employee themselves (by virtue of investment ect), which would make them ineigible.

As far as the LLP is concerned, the prudent approach is not to permit shareholders to participate since even if they qualify as W2 employees there is no guidance from the IRS and gray areas are alway risky.

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