Compliance Q&A: Cafeteria Plan Eligibility – S-Corporation Owners

Employers of all types can sponsor an IRC Section 125 cafeteria plan and permit their employees to pay for qualified benefits on a pretax basis. However, if the employer’s organizational structure is such that the owners are considered to be self-employed individuals, then the owners cannot participate in the Section 125 plan. More than 2% owners of an S-Corp are considered to be self-employed individuals and not employees. Adverse tax consequences will occur if any self-employed individual is permitted to participate in the Section 125 plan.