Section 125 and Company Ownership

In general, most business owners are ineligible for participation in a Section 125 cafeteria plan (e.g., FSA, Commuter benefits) because these owners are considered self-employed individuals, rather than employees of the company. Only employees can participate in cafeteria plans.

In general:

• Owners of a C Corporation who receive W-2s may participate in cafeteria plans, since they receive wages and are technically employees.
• The following individuals cannot participate in an FSA, HSA, HRA, or Commuter Benefits plan:
  • Partners in an LLP or partnership
  • Members in an LLC taxed as a partnership
  • Sole proprietors (or single-member LLCs)
  • More-than-2% owners of an S Corp or an LLC taxed as an S Corp.