I have a business with cafeteria & 401k plans which switched from c-corp to s-corp on 5/1/05. There are 2 shareholders, 50% each.

The question is as an s-corp, must the 50% owners be excluded from the cafeteria plan? They have both been participating since 1/1/05 from my understanding.

Yes, as per the IRC and Treas Regs.

Any idea how to correct for participation since the company changed to an s-corp?

Reverse entries and recalculate 941s etc is the best that I can think of. I never had this situation so I hope someone else has actually been through it and will comment.

Burns is right--add the total $ pre-taxed by the S-corp owner(s) during the S-corp time period and add it back to their W-2 income. By-the-book legal types will also tell you that the company has had "a plan operational failure" and that a plan of correction should be filed with the IRS. Looks better if they get audited.