S-Corp and C-Corp controlled group

[Guest Neno]

We have a plan that is being sponsored by an S-Corporation and has a participating C-Corp as part of a controlled group of corporations. If the owners of the S-Corp are working and being paid from the participating C-Corp, which is also owned by the same owners, can they participate in the Section 125 Plan? Does the fact that they are more than 2% owners of the S-Corp preclude them from participating anyway regardless of where they are being paid? They will not receive any compensation from the S-Corp.

Any help would be appreciated.

[g8r]

There is no guidance on this issue. But, for whatever it's worth, I think the individuals in your situation can participate b/c they are participating as employees of a C Corporation.

[GBurns]

You only referred to a section 125 plan, What about the plans that provide the benefits for which the section 125 choice is being made? The medical etc etc?

Also, You posted that this is a "plan that is being sponsored by an S-Corporation ". Can any of the employees of the other member companies of this controlled group really participate in a plan that the member companies do not also sponsor or even co-sponsor? Even if they do co-sponsor this plan, Would your state law regard it as a MWA or not?

[g8r]

I don't understand G Burns' comments. I think you indicated that the C corp has also adopted the plan (it's part of a controlled group). I don't think it matters what the underlying benefits are. Owners of a C Corp can participate in any of the underlying benefits (that I can think of). So, the issue is whether the person can participate as C Corp employee with respect to his C Corp compensation. I think the answer is yes and it doesn't matter what the underlying benefits are.

I'll admit, I have no idea what being a MWA under state law has to do with it. Have to defer to G Burns for that one...

[GBurns]

MWA should have been MEWA as in Multiple Employer Welfare Arrangement.

While it was stated that other corporations participated, it was not clear that the plan has any sponsor other than the S corp.

Section 125 applies only to the employee pre-tax contributions and the choices made as to where those pre-taxed amounts are directed. Section 125 has to do with relief from constructive receipt of the salary reductions etc.Section 125 has nothing to do with participation in any of the underlying plans.

[g8r]

I understood that you meant MEWA (I just thought you referred to it as MWA). But, I'm still not sure what difference it makes as to whether it's a MEWA or not.

I agree that each of the underlying benefits has its own rules and that 125 is layered on top. There are clearly some benefits where S Corp shareholders can participate but can't use 125 to fund those benefits (e.g., dependent care).

I still think that there is no issue for the 125 plan or the underlying benefits if the person participates as a C Corp shareholder - assuming the C Corp has adopted the 125 plan and the underlying benefits. I guess I made that assumption based on the way the question was worded.