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April 4, 2007

TRANSITION RELIEF FOR DEBIT CARDS USED TO PAY MEDICAL EXPENSES AT STORES WITHOUT HEALTH MERCHANT CODES

The Internal Revenue Service (IRS) has issued Notice 2007-2, which provides transition relief for plan sponsors with debit cards when the cards are used to purchase prescription drugs or other medical goods at grocery or discount stores that do not have a specific health merchant code.¹

Background

As discussed in Segal/Sibson’s August 2006 Bulletin,² prior guidance, Notice 2006-69, generally required that in order to be substantiated electronically, debit card use had to be limited to merchants and service providers with specific health care merchant category codes. However, many debit card vendors had card systems in place that were used in grocery, discount and wholesale club stores that did not have a health care merchant category code. Without transition relief, plan sponsors who used these cards were at some risk of violating the debit card rules because claims were not properly substantiated. This would be true even though debit card companies were working to come into compliance with Notice 2006-69.

The Transition Relief

The transition relief permits use of debit cards through December 31, 2007 at the following:

• Stores without health merchant codes, and
• Mail-order and Web-based vendors that sell prescription drugs.

After December 31, 2007, the transition period ends, and debit cards may not be used at any store, vendor or merchant that does not have a health care related merchant category code, unless the store has an inventory approval system, as discussed in Segal/Sibson’s August 2006 Bulletin.²

In addition, Notice 2007-2 provides that after December 31, 2008, debit cards may not be used at stores with drug store and pharmacy merchant category codes unless the store has an inventory approval system or 90 percent of its gross receipts are related to the sale of qualified medical expenses (including non-prescription drugs).

As with all issues involving the interpretation or application of laws, health plan sponsors should rely on their legal counsel for authoritative advice on IRS Notice 2007-2. Sibson Consulting can be retained to work with plan sponsors and their attorneys on debit cards.

1	To see this Notice, click here. (To return to the Capital Checkup text, click here.)
2	To see the Bulletin, click here. (To return to the Capital Checkup text, click here.)

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