May owners of an LLC (usually called “LLC members”) participate in the LLC's medical plan or cafeteria plan?

An LLC's health plans may create special issues with respect to LLC member participation. This is because LLCs may be treated as either a partnership or a corporation (depending on how the LLC has elected to be treated), and for tax purposes the IRC treats partnerships and corporations differently. No IRS guidance specifically addresses the status of LLC members for purposes of health plan participation, including participation in a medical or cafeteria plan. But the general rules of Section 125 would likely apply as described below.

LLC Structured as a Partnership

Pretax premium payroll deductions are subject to IRC Section 125. Under Section 125, as a general rule only employees are eligible to participate in the cafeteria plan. Partners in a partnership are considered self-employed individuals, not employees. Thus, for LLCs that are taxed as partnerships, members of the LLC generally cannot participate in a cafeteria plan. This means that the LLC members would not be eligible to benefit from the tax advantages of paying premiums on a pre-tax basis. But those LLC members may still be eligible to participate (on an after-tax basis) in the medical policy/plan as an eligible person, depending on the definition of eligibility under the plan.

If, however, the plan is offered on a post-tax basis outside of a cafeteria plan, or on a non-contributory basis (where the employer pays all of the premiums), then the owner may participate in the group health plan. In addition, if they are self-employed as LLC members, the members may be able to take a deduction on their federal income tax returns; this would really be a taxation issue best addressed by an accountant or tax counsel.

LLC Structured as a C Corporation Where LLC Members Are Considered Employees Because They Are Receiving W-2 Reportable Wages

If the LLC has elected to be taxed as a C Corporation, then the LLC member may be considered an employee eligible to participate in the cafeteria plan. That said, the salary reduction under the cafeteria plan may only be from the individual's compensation as an employee.