Maryland Life and Health Insurance License Practice Exam

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

1. An S-Corp Owner with a greater than 2% share

2. Full-time employees

3. Part-time employees

4. Dependent individuals

The correct answer is: An S-Corp Owner with a greater than 2% share

An S-Corp owner with a greater than 2% share is indeed ineligible to participate in a Section 125 Plan. This provision is part of the Internal Revenue Code, which governs cafeteria plans, allowing employees to choose between taxable and non-taxable benefits. However, specifically for S-Corp owners who own more than 2% of the company, the IRS treats them differently. The reason for this is to prevent potential abuse of the plan, as such owners can exercise more control over their benefits and compensation than regular employees. Consequently, the tax advantages of a Section 125 Plan do not apply to them in the same way, creating this ineligibility. In contrast, full-time employees and part-time employees typically can participate in a Section 125 Plan, as long as they meet other requirements set forth by the employer and the plan. Dependents are generally not considered employees under these plans, so they wouldn't be eligible to participate either. The distinction lies in the ownership status of the S-Corp and the regulations designed to maintain fairness and tax compliance among all participants in the plan.