As previously reported, Revenue Ruling 2003-43 addressed the use of employer-provided debit, credit and stored value cards for use to pay expenses reimbursed by health FSAs and HRAs. In that guidance, the IRS stated that, pursuant to Code Section 6401, payments made to medical providers using these cards would have to be reported using Form 1099-MISC. This immediately created a furor among those using the cards, who had embraced cards as a way to make health FSAs and HRAs cheaper and easier to manage. The imposition of Form 1099-MISC reporting was felt to be counterproductive.

As part of the Medicare Prescription Drug, Improvement, and Modernization Act (more commonly known as the Medicare Act) Code Section 6401 was amended. The requirement that card transactions would have to be reported on Form 1099-MISC was repealed, effective for payments made after December 31, 2002.

In response to the amendment of Section 6401, the IRS has issued Notice 2004-16. This notice provides relief from the reporting requirement for payments made prior to January 1, 2003. This means that any payments made prior to the effective date of the Medicare Act amendment will not be subject to the 1099-MISC reporting requirement.

This is good news for employers and TPAs who enthusiastically embraced the use of employer provided debit and credit cards to pay medical expenses but were dismayed by the requirement these payments had to be reported via Form 1099-MISC. The changes made by the Medicare Act and Notice 2004-16 should only encourage more use of debit and credit cards by sponsors of health FSAs and HRAs.