Which of the following is INELIGIBLE to participate in a Section 125 plan?

• A. A sole proprietor
• B. A partnership owner
• C. An S-corp Owner with a greater than 2% share
• D. A C-corp owner

Answer: (C)

Section 125 plans, or cafeteria plans, are available to employees and let them pay for benefits with pre-tax dollars. Those plans are not available to people who aren’t employees or who aren’t treated as employees for fringe-benefit purposes. Because of that, sole proprietors and partners aren’t eligible to participate since they’re considered self-employed for these benefits. For S corporations, ownership matters: shareholders who own more than 2% of the stock are treated as self-employed for fringe-benefit purposes, so they cannot participate in a Section 125 plan on a pre-tax basis. In contrast, an S-corp owner with 2% or less ownership, or a C-corporation owner who is also an employee, can participate as employees. Therefore, the ineligible choice here is the S-corp owner with greater than 2% ownership.