Spouse of Child of 100% S Corp Owner

[Guest TXCafe]

I have a new client that is an S Corp. We've established that the daughter of the 100% owner may not participate. This daughter's husband is also an employee of the company and they have one young child together. I have established that the spouse [is eligible to participate.

However, the question has been posed as to the eligible expenses for reimbursement under a Medical Flexible Spending Account and Dependent Care Flexible Spending Account. Would the daughter's expenses be eligible for reimbursement even though she is not allowed to participate (as an owner under the Section 318 attribution rules)? Would the husband be allowed to claim the dependent care expenses for the child (who would also have ownership under the Section 318 attribution rules even though he/she is underage) under the Dependent Care Flexible Spending Account?

I realize this may trigger some nondiscrimination issues and I welcome comments on that aspect as well but I really need information regarding the eligibility of expenses for the spouse since I can't find any guidance on this.

Thanks!