Q.- Our company is an S corporation owned evenly by two shareholders. Both are employed by the company. They want to participate in our health FSA and pay for their medical coverage with pre-tax dollars. Is this allowed?

A.- No. More than 2% shareholders in a subchapter S corporation cannot participate in a cafeteria plan. You should not let them make pre-tax contributions to the health FSA or pay for their medical coverage through the 125 plan with pre-tax dollars.