Does participation in an ESOP preclude participation in a cafeteria plan because now the EEs own more than 2% of the S-Corp?

[katieinny]

A small S-corp is establishing an ESOP and the question came up about the employees' new ownership in the company due to the ESOP making them ineligible to participate in the cafeteria plan. I hope there's an exception in cases where the ownership is due to the ESOP. Can someone point me in the right direction?

[GMK]

Don't have time to look up cites, but in general the shares in your ESOP account are ignored in determining ownership %s and the like. The shares allocated to ESOP participants' accounts do not preclude participation in the cafeteria plan.

The ESOP owns the shares in the ESOP. Consider that if you were a real owner (owned shares) of an S corp, you'd pay income tax on the corp profits.

[A Shot in the Dark]

Shares allocated to a Plan Participant within an ESOP are not counted in an ownership equation.

Participants of an ESOP do not own the shares that are allocated to them within the ESOP. The trust itself own the shares.

The regulatory answers are in Code Section 318 and 1563.

[ESOP Guy]

Agree with the other two. The shares are titled to the trust not the person, the employee doesn't own the shares.

[katieinny]

I was hoping for that answer. Thanks for your responses. I'll start looking under 318 for something to show the client.