Can S-Corp Owners (i.e., 2% Owners), Sole Proprietors, or Partners in a Partnership Participate in a Premium Conversion Plan (PCP)?

Our PCP Plan Document states that only "Eligible Employees" can participate in the plan, and an Employee is defined as "any person providing services to the Employer or Participating Employer as a common law employee." Because S-Corp owners (i.e., 2% owners), sole proprietors, and partners in a partnership are not common law employees, none of these individuals can participate in the plan. Generally, spouses, children, grandchildren, and parents of S-Corp owners would also be prohibited from participating based on the ownership attribution rules of the Internal Revenue Code.

For this purpose, a 2% owner is someone who directly or indirectly owns (at any time during the year) more than 2% of the stock of an S-Corporation, or stock with more than 2% of the voting power.

The information above should be used for general reference purposes only, as the IRS regulations related to S-Corp owners and the ownership attribution rules are complex. Employers are strongly encouraged to consult knowledgeable benefits counsel for individualized guidance to ensure full compliance with the law.