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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10108
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Can S corp 2% Shareholders/employees use Premium Only Plan

Customer Question

Can S corp 2% Shareholders/employees use Premium Only Plan for pre-tax medical premiums? Which attribution rules apply? Switching from a C to S.
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Hi,

...

Sorry, employees of regular corporations, S corporations, limited liability companies (LLCs), partnerships, sole proprietors, professional corporations, and non-profits CAN all reduce payroll taxes by establishing a Section 125 Premium Only Plan.

...

But the Code prohibits a sole proprietor, partner, members of an LLC (in most cases), or individuals owning more than 2% of an S corporation from participating in the Section 125 POP Plan.

...

Should be noted however, that owners can still benefit from the savings on payroll taxes by sponsoring a plan for their employees.

Expert:  Lane replied 1 year ago.

All attribution rules apply, as they have to do with ownership by related parties being treated as owning both.

..

Rule 1 - An interest owned directly or indirectly by a corporation, partnership, estate or trust is treated as owned proportionately by its shareholders, partners, or beneficiaries.

...

Rule 2 - An individual is treated as owning any corporate interests held by his “family,” where family includes brothers, sisters, half-brothers, half-sisters, spouses, ancestors (e.g., parents, grandparents, etc.), and lineal descendants (e.g., children, grandchildren, etc.).

...

Rule 3– A person having a constructive ownership interest under Rule 1 above (proportionate attribution) is treated as actually owning that interest for the purposes of applying either Rule 1 or Rule 2 in other situations (this is not considered double attribution). However, Rule 2 (family members) cannot be applied in this manner (this is considered to be double attribution).

Expert:  Lane replied 1 year ago.

Looks like you may have asked this question twice ... I'll paste the answer here:

...

Hi,

...

Sorry, employees of regular corporations, S corporations, limited liability companies (LLCs), partnerships, sole proprietors, professional corporations, and non-profits CAN all reduce payroll taxes by establishing a Section 125 Premium Only Plan.

...

But the Code prohibits a sole proprietor, partner, members of an LLC (in most cases), or individuals owning more than 2% of an S corporation from participating in the Section 125 POP Plan.

...

Should be noted however, that owners can still benefit from the savings on payroll taxes by sponsoring a plan for their employees.

...

...

...

All attribution rules apply, as they have to do with ownership by related parties being treated as owning both.

..

Rule 1 - An interest owned directly or indirectly by a corporation, partnership, estate or trust is treated as owned proportionately by its shareholders, partners, or beneficiaries.

...

Rule 2 - An individual is treated as owning any corporate interests held by his “family,” where family includes brothers, sisters, half-brothers, half-sisters, spouses, ancestors (e.g., parents, grandparents, etc.), and lineal descendants (e.g., children, grandchildren, etc.).

...

Rule 3– A person having a constructive ownership interest under Rule 1 above (proportionate attribution) is treated asactually owning that interest for the purposes of applying either Rule 1 or Rule 2 in other situations (this is not considered double attribution). However, Rule 2 (family members) cannot be applied in this manner (this is considered to be double attribution).

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