Jul 05, 2024
Amwins Connect – July 2024 Question of the Month
Question
Can two owners/officers under a S-Corporation Company elect an FSA for themselves or any other owner of the company?
Answer
A 2-percent shareholder-employee of an S-Corporation is not considered an employee for purposes of Section 125 and therefore may not participant in a flexible spending arrangement.
The following individuals are not eligible to participate in a Section 125 plan.
- More than 2% shareholder of an S-corporation, or any of its family members,
- Sole proprietor,
- Partner in a partnership, or
- Non-employee director, solely serving on a corporation’s board of directors, and not otherwise providing services to the corporation as an employee.
From page 3 in Amwins Connect Brief on Benefit Nondiscrimination Rules
Owners and independent contractors cannot participate in employee-sponsored benefits on the same tax-favored basis as employees. In general, any employer contributions made for them must be imputed as additional taxable compensation and their contributions must be made after-tax. In addition, they are not permitted to participate in the employer’s cafeteria plan, health FSA or HRA.
For this purpose, the term “owner” includes a sole proprietor, partner in a partnership, or >2% shareholder in an S-Corp. In the case of a >2% S-Corp shareholder, the owner’s spouse, children, parents, and grandparents are attributed ownership under Section 318 rules and therefore the same restrictions regarding participating on a tax-favored basis in the employer’s benefits do apply.
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