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Who Can Participate: Flexible Benefit Plans

Definition of a Flexible Benefit Plan

"The term 'cafeteria plan' means a written plan under which:

  1. All participants are employees, and
  2. The participants may choose among 2 or more benefits consisting of cash and qualified benefits."

Internal Revenue Code - Section 125(d)

Who Can Participate?

In general, all "eligible" employees can participate. Eligibility can be established on such criteria as a waiting period from date of hire, status as a "fulltime" employee, requirement to await a plan entry date (such as January 1st), and others.

Owners of some types of entities are ineligible to participate, because they are not employees of their businesses in a legal sense. This is usually because they are not a separate tax entity from their business... in other words, they are subject to pass-through taxation of earnings.

What entities can have a Flexible Benefit Plan?

All legal entities (proprietorship, partnership, corporations, non-profit organizations) can sponsor a Flexible Benefit Plan; however, only "employees" can participate.

Here is a listing of legal entities and the participation eligibility of owners.
If the owner cannot participate, we list the eligibility of the owner's spouse, since spouses are frequently bona fide employees of the business. If the spouse can participate, he/she can obviously provide benefits to the owner as a legal dependent.

Proprietorship

Owners cannot participate.

Owner's spouse, if a bona fide employee, can participate.

Partnership

Partners cannot participate.

Partner's spouse, if a bona fide employee, can participate.

C-Corporation
("Regular Corporation")

Stockholders (who are employees) can participate.

S-Corporation
("SubChapter-S Corporation")

Stockholders owning more than 2% of stock cannot participate.

Stockholder's spouse, even if a bona fide employee and not a stockholder, is nevertheless considered a stockholder by attribution, thus cannot participate.

PA (Professional Association)
-or-
PC (Professional Corporation)

Defaults to taxation as a C-Corporation, thus owners can participate.

However, if S-Corporation status is elected, owners of more than 2% of stock cannot participate. In such cases, the stockholder's spouse, even if a bona fide employee and not a stockholder, is nevertheless considered a stockholder by attribution, thus cannot participate.

LLC (Limited Liability Company)
-or-
PLLC (Professional Limited Liability Company)

Owners are called "members".

If there is only 1 member, default taxation is as a proprietorship. Thus, the member cannot participate. The member's spouse, if a bona fide employee, can participate.

If there are 2 or more members, default taxation is as a partnership. Thus, the members cannot participate. The member's spouse, if a bona fide employee, can participate.

However, the members can elect to be taxed as a C-Corporation; thus, the members can participate.

This publication is designed to provide accurate and authoritative information regarding the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.

If you have further questions, please email us.