Family Participation in a cafeteria plan.

[Guest msearle]

It's my understanding that family members of 5% or more share holder in a sub S corporation may not participate in a cafeteria plan, even if they are employees and do not hold stock in the corporation. On a sole proprietorship, do the same family restrictions apply to a cafeteria plan which includes premiums, FSA, and DCAP? In other words, can a son or daughter who receives a W2 participate in the plan?

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[Guest Joe Vasko]

Under a sole proprietorship, the same family attribution rules (IRC Section 318)apply. The owner is considered as self employed (100% share holder)and so are their spouse and relatives, and are unable to participate in the Cafeteria Plan. Both an S-corp and sole proprietorship may sponsor a Cafeteria Plan, but are unable to participate.

Hope this helps.

[Lisa Hand]

Actually under Rev. Rul. 71-588, an employee/spouse of a sole proprietor may participate in the Section 125 plan as well as other family members, provided that they are bona-fide employees. The coverage must be by virtue of the employment relationship and the family members must meet all eligibility requirements (min. hours per week, ect) of the plan.

[SLuskin]

I agree with Lisa about the family members of the sole proprietor who are bona fide employees being able to participate in the plan. However, for the S-Corp, it is 2% shareholders, not 5%

[Guest msearle]

Thanks for your assistance!

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