Debit card technology has simplified the use of health care flexible spending accounts (FSAs). By accessing the stored value on a debit card when making a health care purchase, an FSA participant avoids having to pay for the expense out-of-pocket and then go through a claims submission process in order to be reimbursed. Debit cards also are used in other types of self-insured medical reimbursement plans, such as health reimbursement arrangements.

As the use of debit cards and the popularity of FSAs continue to grow, some retailers are developing online pharmacies that sell only FSA-eligible products. Consumers pay for the goods using their FSA debit cards and can print a receipt at the time of purchase or wait until later. This makes it easier for FSA users to comply with IRS regulations regarding expense documentation. Internal Revenue Service rules require substantiation of expenses for which an FSA participant seeks reimbursement. For transactions conducted with a debit card, IRS rules and notices define how the basic substantiation requirements can be met without the employee having to submit documentation after the fact. When the health care expense is incurred at a provider or merchant that does not have a health care-related merchant category code — such as a grocery store, discount store or online pharmacy — the Internal Revenue Service now requires that such merchants have in place an inventory information approval system (IIAS) in order for the debit card transaction to be processed.

Most major grocery store chains, discount stores and warehouse clubs now have in-store pharmacies to offer shoppers the convenience of filling prescriptions while doing their regular shopping. Plus, over-the-counter medications and health care supplies — pain relievers, cold remedies, first-aid supplies, contact lens solutions and the like — can be paid for with FSA money. Thus, when filling a prescription or picking up an over-the-counter medication, a shopper at these types of merchants frequently will make purchases that cannot be paid for from the flexible spending account. An IIAS is intended to ensure that, in such situations, the debit card is used to pay for only those items that qualify as Tax Code Section 213 medical expenses.

How Does an IIAS Work?

Basically, such a system collects inventory control information about the items purchased and compares that data to a list of qualified medical expenses. At the time of the transaction, the system approves only the amount of the qualified medical expense for payment with the FSA card and requires the card user to pay for any remaining portion of the purchase in some other way. If an employee purchases over-the-counter medications at a grocery store along with a few food items, the IIAS validates the over-the-counter medications as qualified medical expenses, eligible to be paid from the FSA card. This information is then electronically transmitted to the debit card vendor and the employee need not submit any further substantiation on the expense (though it’s a good idea for the employee to hang on to these receipts).If a non-health care merchant does not use an IIAS, an employee’s attempt to use a debit card to pay for a purchase would be rejected by the debit card vendor. The employee would have to pay for the items out-of-pocket, and go through the FSA’s substantiation/claims submission process to receive reimbursement.

The IIAS requirement became effective beginning in 2008 for merchants such as grocery stores, discount stores, warehouse clubs and convenience stores, and for mail-order and online pharmacies. It became effective in 2009 for stores that have a “Drug Stores and Pharmacies” merchant code, but which also sell a significant number of items that would not qualify as Sec. 213 medical expenses. Drug stores and pharmacies for which 90 percent of the gross receipts in the prior taxable year were for items that would qualify as Section 213 medical expenses — including over-the-counter products that so qualify — need not have an IIAS in place in order to process debit card FSA transactions.

Since the IIAS requirement is relatively new, your employees might be encountering situations where their debit card is being rejected for valid health care purchases from a merchant they’ve successfully used the card at previously. Thus, it could be helpful to let employees know why this is happening or to check with your plan’s debit card vendor to see whether it has any communications prepared on this issue.