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Eligibility for over 2% owner


John Feldt ERPA CPC QPA
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An employee has now become a 2.5% owner of their company (S-Corp). They are no longer eligible for pre-tax health insurance deductions and they are no longer eligible for the pre-tax reimbursed medical expense portion of the plan.

What about pre-tax dental insurance premium deductions - are they no longer eligible? Should these be deducted now on an after-tax basis?

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An employee has now become a 2.5% owner of their company (S-Corp). They are no longer eligible for pre-tax health insurance deductions and they are no longer eligible for the pre-tax reimbursed medical expense portion of the plan.

What about pre-tax dental insurance premium deductions - are they no longer eligible? Should these be deducted now on an after-tax basis?

I'm dealing with a more than 2% problem myself. What I've found is that the IRS includes more than 2% shareholders/owners of an S-Corp in their definition of "self-employed" and so they're not eligible to participate in the Cafeteria Plan at all...either in the Premium component or reimbursement components. It's a Section 125 reg so it applies to anything under the Cafeteria Plan..anything being deducted pre-tax.

My situation is a POP with a company(S-Corp) that is primarily more than 2%. They have an HDHP and HSA and they want to allow employees to contribute their share of premiums and employee HSA contributions through the Cafeteria plan. There are no employer contributions at this time. I realize with that many more than 2% it would be a discriminatory plan even if they were allowed to participate. Is there any reg that would allow us to legally allow these employees to get a tax benefit? The S-Corp in question is also part of a Control Group. There is a holding company (also an S-Corp) and the company in question is one of 3 subsidiaries. I'm leaning toward we're stuck and this Plan could only allow one or two employees to participate which means we probably don't do a Plan for the client. But I wanted to see if anyone else had any thoughts. I didn't mean to hijack the post but it seemed an appropriate place to pose the question.

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The S Corp can pay the dental/health ins premium of a 2% owner outside of the pop and the premium will be included as taxable income on the K1. S corp deducts the cost from its taxable income. The amount of the medical/dental premium is deducted by the 2% owner on line 29 of the 1040.

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Yeah I know the more than 2% owners can contribute to the HSA and still get a tax benefit but they wanted it to it through salary reductions and also get the pre-tax benefit on the HDHP. I'm gathering yall don't know of a way to do this legally either...in fact, it's looking like there isn't really one. Thanks for the input though.

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Why cant the s corp owners get a tax deduction for the HDHP by paying the premiums to the ins co or having the employer pay the premiums for them which can be deducted by the employee on line 29 of the 1040? Same tax result as contributing the premium under a 125 plan.

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