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Your plan does not favor key employees as to participation if at least one of the following is true.
· It benefits at least 70% of your employees.
· At least 85% of the participating employees are not key employees.
· It benefits employees who qualify under a set of rules you set up that do not favor key employees.
Your plan meets this participation test if it is part of a cafeteria plan (discussed in section 1) and it meets the participation test for those plans.
When applying this test, do not consider employees who:
· Have not completed 3 years of service,
· Are part-time or seasonal,
· Are nonresident aliens who receive no U.S. source earned income from you, or
· Are not included in the plan but are in a unit of employees covered by a collective bargaining agreement, if the benefits provided under the plan were the subject of good-faith bargaining between you and employee representatives.
Your plan does not favor key employees as to benefits if all benefits available to participating key employees are also available to all other participating employees. Your plan does not favor key employees just because the amount of insurance you provide to your employees is uniformly related to their pay.
S corporation shareholders:
Because you cannot treat a 2% shareholder of an S corporation as an employee for this exclusion, you must include the cost of all group-term life insurance coverage you provide the 2% shareholder in his or her wages. When figuring social security and Medicare taxes, you must also include the cost of this coverage in the 2% shareholder's wages. Include the cost in boxes 1, 3, and 5 of Form W-2. However, you do not have to withhold federal income tax or pay federal unemployment tax on the cost of any group-term life insurance coverage you provide to the 2% shareholder.
Publication 15-B
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