S Corp Shareholders in a cafeteria plan?

[Guest C Brock]

I am getting conflicting information on shareholders in a cafeteria plan. Can a 5%+ shareholder participate in dependent care reimbursement under a cafeteria plan? It appears that some of the information I read indicates the shareholder cannot participate if the amount contributed exceeds 25% of the total amount contributed to the child care portion of the plan. Any clarification will be appreciated!

[Lisa Hand]

Your question is merging several different rules.

First, greater than 2% shareholder of an S corporation may not participate in a Section 125 plan in any category.

For corporations, the 25% rule is the maximum overall plan participation for key employees.

The dependent care testing requires that non-highly compensated account for 55% or more of that benefit.