shareholders in an FSA

[betheeg]

Are shareholders (who own more than 2%) in an s corporation prohibited from participating in a flexible spending plan? Does this prohibition also apply to a dependent care spending account?

thanks for any help...

[g8r]

If it's an health FSA or dependent care FSA offered through a cafeteria plan, then the answer is that more than 2% shareholder can't participate per IRC 1372. They aren't considered employees and a cafeteria plan must generally be for employees.

If these are benefits offered outside of a cafeteria plan (i.e., where an employer offers these at no cost to employees and there is no cash election), then the answer is they can't participant in the health FSA but can participate in the dependent care program (per IRC 129).

[401 Chaos]

This is somewhat off the topic but I am curious if anyone considers de minimis LLC owners (individuals owning less than 2% of LLC interests) to be eligible to participate in employee benefit plans similar to rules for less than 2% S Corp. owners or does their ownership interest, no matter how small, prevent their participation? We have employees who have received relatively small LLC membership interests as bonus / equity ownership amounts but who otherwise are considered regular full-time employees of the LLC.

[GBurns]

The answer will probably depend on how the LLC has chosen to be treated for tax purposes. Has it elected to be taxed as a Corporation or as a Partnership? If Corporation, C or S?

In general, the LLC is a partnership and members in a partnership are treated as being "self-employed". Partners and the Self-employed are not eligible to participate in section 125 plans.

I have never seen anything that exempts "de minimus" members or partners, but it should be researched further. Are these members listed in the ownership documents?

[401 Chaos]

GBurns,

Thanks for your response. That has always been my general understanding as well and what we generally concluded as well. The LLC here elected to be taxed as a partnership. The members were listed as "employee members" or something similar in an amendment to the ownership documents.