The IRS has released Notice 2004-16 on March 1, 2004.

Under Code 6041 persons making payments directly to health care providers are required to report miscellaneous compensation to the IRS, enabling it to reconcile information provided by the taxpayers on their income tax returns.  Consequently, health FSAs making payments directly to medical care providers of $600 or more in any calendar year are required to file Form 1099-MISC.  In 2003, Congress amended Code 6041 to provide that Form 1099-MISC reporting requirements do not apply to payments made from health FSAs and HRAs to medical service providers after December 31, 2002. 

Notice 2004-16 provides that certain information reporting requirements of Rev. Rul. 2003-43, 2003-21 I.R.B. 935, will not apply to payments made pursuant to flexible spending arrangements (FSAs) or health reimbursement arrangements (HRAs) prior to January 1, 2003. The 1099-MISC reporting requirement was not a problem for traditional health FSAs that reimburse participants after medical services were provided. 

The 1099-MISC reporting requirement had been a concern; however, for health FSA and HRAs that occasionally paid the medical service providers directly such as those that use electronic payment cards. This Notice effectively eliminates the 1099-MISC reporting requirements for traditional health FSAs or HRAs and those that use electronic payment cards, allowing such plans to make direct payment to providers.

To read IRS Notice 2004-16, click here.