Eligibility Requirements

Who is eligible to participate in FSAs?

With few exceptions, almost all employees can participate in the FSA . Exceptions include partners in a business, members of LLCs, and shareholders who own 2% or more in S-corporations. Only employees may participate in a Healthcare or Dependent Care FSA.

Domestic partners are eligible to use an employee's FSA only if they are also a dependent under IRS Code 152.

FSAs cannot discriminate in favor of highly compensated employees. Annual nondiscrimination testing is required and provided by Sterling.

What is a "highly compensated" employee?

Highly compensated employees are defined as:

• One of the 5 highest paid officers
• Own more than 10% of the company
• One of the highest paid 25% of all employees

Does Sterling offer FSA nondiscrimination testing?

Yes. Sterling will provide nondiscrimination testing annually to make sure the employer is in compliance.

Is a health insurance plan required to set-up an FSA?

No. Employers can offer FSAs without also offering health insurance plans.

What is the definition of a qualifying dependent?

IRS Code Section 152 has a two-prong definition of a dependent - qualifying child and qualifying relative. A qualifying child is any son, daughter, brother, sister, niece, nephew, or grandchild who:

• Will not be age 19 during the year (or 24, if a full-time student). The exception is in the case of a disabled child who is considered as satisfying the age requirement despite their actual age.
• Has the same principal address as the taxpayer for more than half of the year
• Does not provide over half of his/her own support

A qualifying relative is any individual who:

• Is not a qualifying child of any other person
• Has income less than the exemption amount (see your tax advisor for details)
• Receives over half of his or her support from the taxpayer
• If a non-relative, resides with the taxpayer the entire year