Tax & Accounting Blog

Who’s a Form 1099-K Filer and Who’s Not?

1099, 6050W, Information Reporting for Wealth Management, ONESOURCE, Tax Information Reporting, Trust Tax January 23, 2012

This IRS Letter Ruling Adds to Our Understanding

IRS Letter Ruling 201201001 illustrates that the structure of a business that manages prescription drug benefit plans puts it outside the purview of I.R.C. Section 6050W information reporting (Form 1099-K). The conclusion was based on the fact that the business serves plan sponsors on the one hand and makes payments to pharmacies on the other hand, but does not have contractual obligations to transfer payments from plan sponsors to pharmacies. 

The fact situation is analogous to the one set forth in IRS Notice 2011-78 (September 22, 2011), which provided that an insurance company or an affiliate administering a self-insured arrangement on behalf of an employer or other entity on a cost-plus basis, or under an Administrative Services Only plan or an Administrative Services Contract plan will not be treated as a third-party settlement organization with Section 6050W reporting responsibility.

The federal tax code requires third-party settlement organizations to file information returns (Forms 1099-K) for payments made in settlement of third-party network transactions. The tax regulations define a third-party settlement organization (TPSO) as a central organization that has the contractual obligation to make payments to the participating payees of third-party network transactions. A central organization is a TPSO if it provides a third-party network that allows purchasers to transfer funds to providers of goods and services.

Letter Ruling 201201001 concludes that the company requesting the ruling is not a TPSO because the company does not enable purchasers (the plan participants) to transfer funds to providers of goods and services (pharmacies). There is no direct correlation between insurance premiums or plan fees paid to the company and payments made by the company to pharmacies; instead, the premiums were paid for the distribution of benefits at a later time.

This Letter Ruling can be read in its entirety or downloaded from http://www.irs.gov/pub/irs-wd/1201001.pdf .