Change the bold to this:
Well it looks like they still need a medical, it was only for simulators. However, as midlifeflyer pointed out, they are not PIC for his reasons.
Sorry it appears I didn't read the FAR completely before posting it. Learn from my mistakes!
There is also another reason why they need a medical. Did you catch where midlifeflyer said: "FAA Order 8900.2, the Designee Handbook, requires that a DPE be qualified to act as PIC (even though she isn't PIC). Part of that is maintaining at least a 3rd class medical if a medical would be required to act as PIC"?