Multiple 1099 Misc Form from One Employer - DOC by cko19761


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[Rev. Rul. 2003-43 (May 6, 2003)] For a copy:

The IRS has issued guidance that gives the green light to the use of
debit and credit cards for health FSAs and HRAs, but only if claims
substantiation requirements are satisfied for each claim (no sampling
permitted). These cards allow participants to access health FSA or HRA
funds to pay providers at the point of service, thereby streamlining
claims administration and avoiding cash-flow hardships for

Under existing claims substantiation requirements, "a health FSA may
reimburse a medical expense only if the participant provides a written
statement from an independent third party stating that the medical
expense has been incurred and the amount of such expense and the
participant provides a written statement that the medical expense has
not been reimbursed or is not reimbursable under any other health plan
coverage." Prop. Treas. Reg. Sec. 1.125-2, Q/A-7(b)(5). And there must
be independent review of every claim to ensure that it qualifies for
reimbursement. As described below, the new guidance relaxes the
existing claims substantiation requirements to a certain extent, and
not just for debit and credit card transactions.

While the guidance generally contains good news for employers and
administrators that want to use debit or credit cards, it also contains
some bad news: "Under the facts described, payments made to medical
service providers through the use of debit, credit, and stored-value
cards are reportable by the employer on Form 1099-MISC under [Code
Section] 6041." Form 1099-MISC reporting isn't an issue under
traditional health FSAs or HRAs that require participants to complete a
reimbursement request form and where, days or weeks after the medical
services are provided, reimbursements are made to participants rather
than payments to providers.

The guidance describes three scenarios involving debit and credit
cards. In two of these scenarios (one involving a debit card and one
involving a credit card), the IRS found that payments made using the
cards would qualify for exclusion from participants' gross income
because the employer had implemented procedures for adequately
substantiating that each payment met the tax code's requirements. In
the third scenario, however, the employer used sampling techniques
under which only certain payments made using the cards were selected
for review and had to be substantiated. The IRS found that because the
employer's sampling approach did not provide for the required
substantiation of every claim, all payments made during the year,
including those for medical expenses, would be included in
participants' gross income.

Below, we discuss the characteristics of the debit and credit card
system that met with IRS approval.

==> PARTICIPANT CERTIFICATION. Participants certified upon enrollment
in the plan and each plan year thereafter that they would only use the
card for their eligible medical care expenses (and those of their
spouses and dependents). Participants also understood that with each
use of the card, they were reaffirming a certification--printed on the
back of the card--that any expense paid with the card had not been
reimbursed and that they would not seek reimbursement under any other
plan covering health benefits. Participants also agreed to acquire and
keep sufficient documentation (e.g., invoices and receipts) for
expenses paid with the card.

==> CARD USAGE. The card's debit balance (or credit limit) was limited
to the amount of the participant's health FSA or HRA coverage. When a
cardholder used the card at the point of sale, the merchant or service
provider was paid the full amount of the charge (assuming that there
was sufficient coverage available in the health FSA or HRA), and the
cardholder's maximum available coverage remaining was reduced by that
amount. The card was canceled upon termination of employment (COBRA
continuation coverage was not mentioned; presumably post-termination
claims could be submitted in the traditional way by submitting receipts
or EOBs to the employer with a reimbursement request form). Under the
credit card scenario, the issuing bank would pay the merchant and the
employer would reimburse the bank.

==> MERCHANTS RESTRICTED. Cards were only effective at merchants and
service providers authorized by the employer. Their use was limited to
specified "merchant codes" relating to health care (i.e., doctors,
pharmacies, dentists, vision care offices, hospitals, and other medical
care providers).

was reviewed and substantiated, either automatically without further
documentation or manually through submission of merchant or provider

Automatic Substantiation and Adjudication: Three categories of expenses
were treated as automatically substantiated without a receipt or
further review: (1) transactions that equaled the exact dollar amount
of the co-payment for the service under the participant's major medical
plan (e.g., $15); (2) recurring expenses that matched
previously-approved expenses (e.g., a prescription that was regularly
refilled by the same provider for the same charge); and (3) charges
that were substantiated in "real time" (i.e., at the time and point of
sale) with information from the merchant, service provider, or an
independent third party (e.g., a pharmacy benefit manager) verifying
that the charge was for a medical expense (for example, a provider
might be prompted to enter treatment codes or additional information
about the type of care, date of service, and charges when obtaining
authorization for the card).

After-the-Fact Substantiation and Adjudication: All charges to the card
that were not automatically substantiated were treated as conditional
charges pending after-the-fact confirmation that the charge was a
permissible one. The employer required that "additional third-party
information, such as merchant or service provider receipts, describing
(1) the service or product, (2) the date of the service or sale and,
(3) the amount, be submitted for review and substantiation."

employer's health FSA and HRA plan documents provided that employees
were required to repay any card payments later identified as ineligible
for reimbursement. If the employee failed to repay, the employer would
withhold the amount from the employee's compensation, to the extent
consistent with applicable law. Amounts still outstanding were offset
(i.e., recouped) from future claims. In addition, the employee would be
denied access to the card until the debt was repaid. And if these
correction procedures were unsuccessful, the employee would remain
indebted to the employer for the amount of the payment, which would be
treated the same as any other business indebtedness.

==> TRADITIONAL REIMBURSEMENT REQUESTS. Participants could also submit
claims the traditional way without using the card (i.e., by submitting
receipts or EOBs to the employer with a reimbursement request form).

==> SAMPLING NOT PERMITTED. While a debit and credit card system with
the above characteristics met with IRS approval, a system employing
sampling techniques was rejected. Under the sampling approach rejected
by the IRS, the employer reviewed only a percentage of the card
transactions, based on the transaction amounts (for example, the
employer reviewed 5% of doctor's office transactions below $150 and not
otherwise substantiated, on the assumption that almost all such charges
are for eligible medical care). Moreover, the employer did not review
card transactions where the dollar amount was a multiple of a specified
whole-dollar amount (e.g., $5, $10, $15, etc.) on the assumption that
these were co-payments, or any transactions below a low dollar
threshold (e.g., $25). The IRS said that payments made by plans using a
sampling method won't qualify for the exclusion from income (i.e., must
be treated as taxable benefits) starting with plan years beginning in

EBIA Comment: Here are some of our first reactions to the IRS guidance.
We'll be discussing it in greater detail at our 5th Annual Advanced
Cafeteria Plans seminar in Seattle in July. Information about the
seminar and a registration form can be downloaded at .

1. The IRS guidance takes a middle-of-the-road approach. The guidance
approves of the use of debit and credit cards for health FSAs and HRAs
in situations where every claim is substantiated and adjudicated, but
it rejects the use of card systems that employ a sampling approach to
satisfy the substantiation and adjudication requirement. Employers and
administrators that have been using the sampling approach will need to
bring their arrangements into compliance with the IRS guidance by the
2004 plan year. But interestingly, the IRS did not shut the door
completely on sampling--the guidance includes a request for comments on
other "sampling techniques and statistical approaches" that might
provide enough certainty to serve as substantiation that an employee
has incurred a medical expense.

2. We are pleased that the guidance relaxes the substantiation and
adjudication requirements by permitting three categories of claims to
be automatically substantiated and adjudicated with debit and credit
card systems (certain co-pays, recurring expenses and expenses
substantiated in real time) and by permitting other claims to be
substantiated and adjudicated after the fact, so long as meaningful
correction procedures are in place to recoup improper payments. While a
participant might still be able to make ineligible purchases with a
debit or credit card from a vendor with a health care-related merchant
code (e.g., a participant buys aspirin or other over-the-counter
medication that is ineligible for reimbursement under a health FSA at a
pharmacy), the guidance accepts that these ineligible purchases can be
identified and dealt with through the employer's after-the-fact
substantiation procedure.

3. Even for employers that do not use debit or credit cards, the
guidance contains some good news. The guidance revises the "participant
statement" that is required to satisfy the substantiation requirement.
As discussed above, under current regulations, a participant must
provide "a written statement that the medical expense has not been
reimbursed or is not reimbursable under any other health plan
coverage." Prop. Treas. Reg. Sec. 1.125-2, Q/A-7(b)(5). But the
guidance approves of a more realistic participant certification--that
"any expense paid with the card has not been reimbursed and that the
employee will not seek reimbursement under any other plan covering
health benefits." (The IRS guidance indicates that its changes to the
claims substantiation rules will be reflected in the final cafeteria
plan regulations.) We understand that this new standard applies to all
health FSAs and HRAs, not just those involving debit and credit cards.
So, for example, employers using a traditional paper reimbursement
request form might wish to revise the participant certification portion
of the form to say something like this: "I, the participant, certify
that I have not been reimbursed for the above expense(s) and that I
will not seek reimbursement under any other plan covering health
benefits." The new "will not seek reimbursement" standard that replaces
the old "is not reimbursable" standard is one that EBIA has advocated
for some time (see our Cafeteria Plans manual at Section XX.N.2, "IRS
Needs to Revise the Rules").

4. The Form 1099-MISC requirement is the fly in the ointment. As stated
in the guidance, "Under the facts described, payments made to medical
service providers through the use of debit, credit, and stored-value
cards are reportable by the employer on Form 1099-MISC under [Code
Section] 6041. Section 6041 provides for information reporting by
persons engaged in a trade or business who make payments of fixed or
determinable income to another person in the course of such trade or
business of $600 or more in a taxable year. The exceptions provided in
[Reg. Sec.] 1.6041-3 may apply to this requirement, such as the
exception for payments to tax-exempt hospitals." Note that payments to
pharmacies for prescription drugs are not subject to 1099-MISC
reporting, but payments to doctors, dentists, for-profit hospitals, and
other providers of medical or health care services would need to be
reported once the $600 threshold is reached. This part of the IRS
guidance is likely to create a substantial administrative burden for
many employers and administrators, and will require significant changes
in the way debit and credit card programs are structured. We also
suspect that many employers currently offering the cards are not
issuing Form 1099-MISCs. Note that the reporting requirement is
triggered whenever aggregate payments to a medical service provider
(not any one payment or payments on behalf of a single participant)
accumulate to $600 or more in a year, which would require tracking of
the payments to each provider. Moreover, service providers' taxpayer
identification numbers (TINs) would have to be collected, either at the
point of use or when a conditional payment is substantiated. In light
of the expected adverse reaction by employers and administrators, IRS
reconsideration of this portion of the guidance would be welcome. Some
practitioners argue that when using a debit or credit card, a
participant is making payment to the medical provider and is then
immediately reimbursed by the health FSA or HRA, just like a
traditional non-debit or credit card health FSA or HRA, under which
after-the-fact reimbursements to participants don't require a
1099-MISC. If the IRS doesn't reverse its view on the 1099-MISC issue,
the marketplace will need to adjust. Debit and credit card systems will
need to be revised to capture the necessary TIN information. This
portion of the IRS guidance does not have a delayed effective date,
which means that employers and administrators should prepare to file
Forms 1099-MISC for payments to service providers in 2003, unless the
IRS reconsiders and grants some relief. (The guidance does not address
Form 1099-MISC reporting for earlier years.)

5. Employers and administrators considering the use of debit and credit
cards and those that already offer them should review the IRS guidance
in detail and structure their programs in accordance with the guidance.
For more information, see EBIA's Cafeteria Plans manual at Section
XXI.N ("Issues Raised by Using Electronic Payment Cards to Expedite
Claims Processing for Health FSAs and HRAs"). As mentioned above, we'll
also be discussing the new guidance on debit and credit cards at our
5th Annual Advanced Cafeteria Plans seminar in Seattle in July.

Contributing Editors: EBIA Staff

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