FSA plan for 1 person S-corp

[mbozek]

As I understand it Proposed reg 1.125-1(g) limits participation in an FSA to employees and self employed persons are excluded from participation. Under IRC 1372 a more than 2% owner of a S corp is considered self employed for taxation of fringe benefits. In otherwords any fringe benefits paid by the S-Corp on behalf of or to the owner are included as taxable income to the owner subject to available deductions, e.g., health insurance which is included as wages on the owner's w-2 and deducted on line 29 of the 1040.

The above would imply that FSA amounts paid to the owner would be regarded as a taxable fringe benefit for which no corresponding tax deduction is permitted but I cannot find a confirmation of this answer.

Is there an IRS cite?

[J Simmons]

As I understand it Proposed reg 1.125-1(g) limits participation in an FSA to employees and self employed persons are excluded from participation. Under IRC 1372 a more than 2% owner of a S corp is considered self employed for taxation of fringe benefits. In otherwords any fringe benefits paid by the S-Corp on behalf of or to the owner are included as taxable income to the owner subject to available deductions, e.g., health insurance which is included as wages on the owner's w-2 and deducted on line 29 of the 1040.

The above would imply that FSA amounts paid to the owner would be regarded as a taxable fringe benefit for which no corresponding tax deduction is permitted but I cannot find a confirmation of this answer.

Is there an IRS cite?

You might want to check the IRS Coordinated Issue Papers issued March 29, 1999. If you can't locate them, let me know by e-mail and I'll send them.

[Guest jackmo]

How can there be FSA payments to the owner if a more than 2% owner can't particpate? Is this a correction of mistaken payment(s)? If it is, it seems that you would simply add the dollar value of any erroneous FSA payments back to the owner's W-2. Then the owner would be able to deduct the cost of health care on his 1040.