Set Up Dependent Care FSA for Sole Proprietor LLC: Is it Even Possible?

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MoneyJungle
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Set Up Dependent Care FSA for Sole Proprietor LLC: Is it Even Possible?

Post by MoneyJungle » Tue Sep 19, 2017 2:21 pm

Hello,

Would appreciate your insight if anyone has encountered and successfully dealt with this scenario? I've tried to lay out the use case succinctly below. Thank you in advance to anyone that might have seen this one come up!

1. I'd like to set up a dependent care FSA vehicle through my wife's LLC. She is sole proprietor and sole employee and 99% owner. I own 1%.

2. We would like to pay out through the FSA the max $5,000 to daughter's pre-school and then take a deduction on this amount.

2.5 Unfortunately, my W2 employer won't offer an FSA this year, so we are forced to explore this scenario through my wife's sole proprietorship.

3. Also unfortunately, it looks like there are restrictions, if not an outright prohibition, on sole proprietors taking advantage of the dependent care FSA vehicle.

4. As far as I can tell from online research, a section 125 "cafeteria" plan style dependent care FSA looks like a non-starter for sole proprietor LLCs.

5. HOWEVER, the "Section 129" rules for a "DCAP" are more vague. This guy doesn't think they yield to a sole proprietor LLC, but he's only one guy: http://www.thetaxbook.com/updates/TheTa ... ietors.pdf

6. So my question for you bogleheads: Have you seen a sole proprietor take advantage of a dependent care FSA? If so, could you tell me how?

7. If it's possible within IRS rules, do you or your network recommend any vendors for establishing the plan?

Thank you in advance for any insight!
"The avoidance of taxes is the only intellectual pursuit that still carries any reward." -- JM Keynes

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