“Can one be an owner (employer) AND an employee in the IRS's eyes? By definition, operating a sole proprietorship or joint venture one is not an employee, but self employed. So, does one need to form a C or S corp to seperate being an owner from an employee....if yes, what about the exclusion of owners of more than 2%?”--->I guess. For example, even though you've been operating as a sole proprietor and now you need to hire or CAN hire a few employees. Like any other business, there are no limitations to the number of employees a sole proprietorship can hire. Does that mean you need to incorporate? Probably not.; not necessarily. However, you can still incorporate as an S corp or C corp if you want. Yes, as you said, the plan must NOT discriminate in favor of highly compensated employees,i.e., one of the five highest-paid officers of the employer or one that is in the top 25% of highest paid employees, with respect to eligibility to participate or benefits provided under the plan.
“Really, is the best configuration of a husband/wife business to have ONE as the owner and the other as an employee and have the benefits cover the employee, spouse and dependents?”-->I believe so; Section 105 of the US tax code ALSO allows self employed and home based business owners to create their own medical reimbursement plan and realize the same tax advantages as big corporations. Section 105 works well for sole proprietors who are able to legitimately employ a spouse who is active in the business. An employed spouse will be treated as any other employee, with the business owner offering medical benefits as part of the employee's compensation package.