More-than-2% shareholders of an “S-Corp” cannot participate in a cafeteria plan, as they are treated by Code 125 the same as partners and are considered self-employed. Unlike the other business types, spouses, children, parents, and grandparents of more-than-2% shareholders may NOT participate in the cafeteria plan.
What is a cafeteria plan and how does it work?
A cafeteria plan is a separate written plan maintained by an employer for employees that meets the specific requirements of and regulations of section 125 of the Internal Revenue Code. It provides participants an opportunity to receive certain benefits on a pretax basis.
What is covered under a cafeteria plan?
A Section 125 Cafeteria Plan is an employer-sponsored benefits plan that lets employees pay for certain qualified medical expenses – such as health insurance premiums – on a pre-tax basis. Typically, they can use the pre-tax money to pay for health insurance premiums, retirement deposits, or other benefit options.
Is an HRA a cafeteria plan?
Sometimes overlooked are health reimbursement arrangements (HRAs) or a cafeteria plan, employer-funded accounts that can be a solid first step in transitioning to a consumer-directed approach to health care. Employees can use an HRA to pay for their qualified medical expenses, along with those of a spouse and children.
Can a C Corp participate in a cafeteria plan?
No regulations exclude shareholders of any percentage in a “C-Corp” from participating in a cafeteria plan. However, excessive participation of these individuals in the cafeteria plan may cause the failure of certain non-discrimination tests.
Can a sole proprietor participate in a cafeteria plan?
Sole proprietors, partners in a partnerships, and more-than-2% shareholders in an S-Corporation have special considerations concerning participation in a Cafeteria Plan. While sole proprietors cannot directly participate in the plan, they may legitimately employ their spouse and offer the spouse the benefits of the plan.
What are the rules for a section 125 cafeteria plan?
In order to receive these tax advantages, a cafeteria plan must comply with the rules of Internal Revenue Code (Code) Section 125 and related Internal Revenue Service (IRS) regulations. Under these rules, a Section 125 plan must have a written plan document and can only offer certain qualified benefits on a tax-favored basis.
Is there an exception for S corporation shareholders?
Exception for S corporation shareholders. Plans that favor highly compensated employees. Plans that favor key employees. Eligible employer. Eligibility and participation requirements. Contribution requirements. More information. 2. Fringe Benefit Exclusion Rules Accident or health plan. Employee. Special rule for certain government plans.