S-corp owners and FSA/POP plans

[Guest PRafferty]

A potential client was told S-corp owners and family members would not be allowed to participate in an FSA or POP plan. She was told by someone else that the owner would not be able to participate but she, as a family member, could enter the plan if she could prove that she was an employee. Has anyone heard of this? Thanks for any help!

[SLuskin]

Sorry, but the Code Section 318 rules on attribution of stock apply here. In a sole proprietorship, since there is no stock or partnership shares, a spouse who is a bona fide employee can participate in a Section 125 Plan. But not the spouse, parents, children or grandchildren of the more than 2% shareholder.

You only attribute stock once. So, if the owner's daughter and son-in-law are both employees, the son-in-law can participate (assuming the daughter has no stock in her own name).