Flexible Spending Accounts (FSA) and/or Health Reimbursement Arrangement (HRA) cards can only be used at drug stores or pharmacies that have implemented an IIAS system.  The IRS requires merchants selling health care eligible products to support an Inventory Information Approval System (IIAS).  

The Special Interest Group for IIAS Standardization (SIGIS) association is composed of a broad range of participants who manages an IIAS for the IRS requirements.  MasterCard and Visa requires merchant registration upon successful IIAS implementation.

On March 23, 2010 the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively "the Act") were signed into law by President Obama. The Act includes a number of modifications to employee benefit programs including a new provision as to what is considered eligible for reimbursement under Section 106 of the Internal Revenue Code of 1986, which affects requirements for transactions conducted with payment cards accessing these funds, by adding reimbursements for medicine restricted to prescribed drugs and insulin.

For purposes of this section and section 105, reimbursement for expenses incurred for a medicine or a drug shall be treated as a reimbursement for medical expenses only if such medicine or drug is a prescribed drug (determined without regard to whether such drug is available without a prescription) or is insulin.

SIGIS is undertaking a complete review of the Eligible Product List (EPL) and will update the list as necessary to reflect the new eligible item criteria. Effective January 1, 2011, current OTC (over the counter) items on the EPL will remain eligible medical items except drugs and medicines, which will need to be prescribed. SIGIS will update the EPL, effective January 1, 2011, by removing drugs and medicines.

This change will have impact to both certified IIAS merchants and 90% Rule registered merchants, though both are impacted in different ways.

Impact on certified IIAS merchants

Effective January 1, 2011, some over-the-counter (OTC) healthcare products will no longer receive an approval at the point-of-sale (see product categories below).  OTC products, such as drugs and medicines that were eligible healthcare products in 2010, will now require a prescription and thus will no longer be on the list as eligible expenses.

Consumers will be required to purchase OTC medicines using some other form of tender and then submit a reimbursement request, accompanied by a doctor's prescription to their health benefit plan.  IIAS merchants may see an increased amount of declines on FSA/HRA card transactions due to the new EPL requirements.

IIAS merchants must download the EPL by December 31, 2010 for a January 1, 2011 effective date.  SIGIS will continue to assess the EPL, removing items no longer considered eligible under the Act, in order for certified IIAS merchants to meet the new eligibility criteria.  SIGIS will make the updated EPL available to certified merchants in advance of the January 1, 2011 effective date.

Impact on 90% Program Registered Merchants

Merchants registered under the 90% program were exempt from having to implement an IIAS if, in the prior tax year 90% of gross sales were derived from eligible healthcare products.  90% merchants will be required to re-register with SIGIS by December 31, 2010 based on the new EPL and eligibility requirements that become effective on January 1, 2011 (see product categories below). Since the Act eliminates many OTC items previously deemed eligible, some merchants may no longer meet the 90% program requirements and as such will either have to implement an IIAS or stop accepting FSA and HRA payment cards altogether.

The following OTC categories of items will require a doctor's prescription and thus, will not be eligible for purchase using a health care debit card on January 1, 2011:

• Acid Controllers
• Allergy & Sinus
• Antibiotic Products
• Anti-Diarrheals
• Anti-Gas
• Anti-Itch & Insect Bite
• Anti-parasitic Treatments
• Baby Rash Ointments/Creams
• Cold Sore Remedies
• Cough, Cold & Flu
• Digestive Aids
• Feminine Anti-Fungal/Anti-Itch
• Hemorrhoidal Preps
• Laxatives
• Motion Sickness
• Pain Relief
• Respiratory Treatments
• Sleep Aids & Sedatives
• Stomach Remedies

The following are examples of some of the OTC items that will remain available without a doctor's prescription:

• Band Aids
• Birth Control
• Braces & Supports
• Catheters
• Contact Lens Supplies & Solutions
• Denture Adhesives
• Diagnostic Tests & Monitors
• Elastic Bandages & Wraps
• First Aid Supplies
• Insulin & Diabetic Supplies
• Ostomy Products
• Reading Glasses
• Wheelchairs, Walkers, Canes

Although January 2011 is still many months away, merchants should begin to plan now for these changes to IIAS in order to be prepared.  Merchants must register to continue to accept FSA cards at http://www.sig-is.org/en/index.asp.