Inventory Information Approval System - IRS Requirements To Use IIAS

IRS Requirements To Use IIAS

Though IIAS was first used in 2005, it was not officially approved by the Internal Revenue Service until July 2006, in IRS Notice 2006–69. At the same time, the IRS decided to crack down on FSA/HRA providers that were not following prior IRS guidance on FSA debit cards. As part of this, the IRS decided that grocery and discount stores would not be allowed to accept FSA debit cards unless they installed an IIAS; they decided it would be too easy to misuse the cards if they could be used at grocers and discounters for anything they sold, even if the grocer or discounter also had a pharmacy. However, they permitted stand-alone chain or independent pharmacies (known as "true pharmacies") to accept the card without an IIAS.

Grocers and discounters immediately challenged the IRS ruling, claiming that their pharmacies were being discriminated against, and that since most "true pharmacies" sold ineligible goods as well, the risk from them was just as great. Therefore, two changes were made by IRS Ruling 2007–02 in December 2006:

• Grocers and discounters are allowed to keep accepting the cards until December 31, 2007; this was to give them sufficient time to install an IIAS.
• "True pharmacies" are required to install an IIAS after June 30, 2009, unless at least 90% of the individual pharmacy's sales are of "FSA-eligible" items, i.e., prescription drugs or over-the-counter (OTC) items.

Most major pharmacy chains report that 60–65% of their sales come from the pharmacy; therefore, OTC would have to account for 25–30% of their total sales for them to qualify, which is unlikely—especially since each individual pharmacy must qualify separately. Therefore, only independent pharmacies are likely to qualify for the exemption.

Because of this ruling, by 2009 most grocers, discounters, and chain or Internet pharmacies in the U.S. must have an IIAS in place in order to accept FSA debit cards.