NU Online News Service, Nov. 25, 2003, 5:31 p.m. EST – Congress has given an early Christmas gift to the companies that are selling debit card-based systems for administering flexible savings accounts and health reimbursement arrangements.[@@]

One part of H.R. 1, which is known as the Medicare Prescription Drug, Improvement and Modernization Act of 2003, relieves employers that offer FSAs and HRAs from the obligation to send annual tax forms to individuals and organizations that do business with plan members.

The section will become Section 1203 of the federal Social Security Act.

Earlier this year, the Internal Revenue Service ruled that an FSA or HRA sponsor ought to send 1099 forms to providers of “medical and health care services” that get more than $600 in payments from the employer’s FSA or HRA plan.

The ruling states that “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 section 6041,” according to a joint House-Senate explanatory statement about H.R. 1 that is posted on the House Ways and Means Committee Web site.

The May IRS ruling exempted pharmacies and nonprofit hospitals from the 1099 reporting requirement, according to Cobra Compliance Inc., Centennial, Colo.

Now, Section 1203, which appears on page 678 of a version of the H.R. 1 conference report posted on the Ways and Means Web site, says the Form 1099 reporting requirement “does not apply to certain health arrangements.”

The arrangements exempt from the reporting requirements are FSAs and HRAs, according to the bill text. The exemption applies to FSA and HRA payments made after Dec. 31, 2002.

The Senate passed H.R. 1 today and the House passed it Saturday. Experts say President Bush, a strong supporter of the bill, is almost certain to sign it into law.

Evolution Benefits Inc., Avon, Conn., one of the companies competing to sell card-based FSA and HRA administration systems, welcomed the prospects of Section 1203 soon becoming law.

The May 1099 requirement ruling “has been a barrier to employers considering cards for their benefits programs,” Evolution Chief Executive Robert Patricelli says. “Our company alone had about 150,000 individual debit card accounts that were held up by this provision.”

Many employers that adopted card-based administration systems avoided the 1099 reporting requirements by using cards only to administer prescription drug plans, Patricelli says.

Links to the conference report and the joint explanatory statement are on the Web at http://waysandmeans.house.gov/Special.asp?section=43