New rules issued by the IRS are affecting the way many retailers process the debit cards issued for use with medical flexible-spending accounts (FSAs) and health-reimbursement accounts (HRAs), allowing for instant approval.
Effective Jan. 1, the IRS requires all retailers classified as “non-healthcare” but that sell medical goods and services, such as supermarkets, full-line discount stores, warehouse clubs and mail-order merchants, to identify transactions that are eligible for payment through an FSA or HRA debit card. The operative term for the POS modifications is Inventory Information Approval System (IIAS), and it enables real-time, auto-substantiation of eligibility on items being purchased.
Although the ruling that went into effect last month for non-healthcare retailers came as little surprise, what was unexpected was a subsequent ruling by the IRS that requires pharmacy retailers to also become IIAS-compliant with POS transactions by Jan. 1, 2009.
“When the IRS ruling on IIAS came out, it became clear to all the major stake-holders that it would be better to develop one industry standard for building an IIAS solution rather than each stakeholder creating their own,” stated David M. Fitzsimmons, VP, finance and accounting, for the National Association of Chain Drug Stores (NACDS).
Early in 2006, NACDS joined with representatives from the Food Marketing Institute (FMI), the finance industry, benefits providers and retailers to form a group that would evaluate and define best practices for IIAS compliance. In December, the Special Interest Group for IIAS Standards (SIGIS) was formally incorporated and simultaneously introduced a voluntary industry-standard solution to meet the IRS requirements.
Retailers that were among the founding members of SIGIS include CVS Caremark Corp.; Longs Drug Stores; Target, Wal-Mart Stores and Sam’s Club.
Greg Licata, senior director of strategic initiatives in the health-care payments division of Milwaukee-based Metavante Corp., was elected president and chairman of the board of SIGIS. Licata told Chain Store Age, “We knew we had to pull together to create a single standard and to enable the broadest adoption as quickly as possible.”
The IIAS-compliant industry standard established by SIGIS enables consistent processes for POS transactions and the data retention required for potential IRS audits. When a consumer’s FSA or HRA debit card is swiped for payment, the POS system automatically identifies the account and compares the purchased items to a standard SIGIS-established list of acceptable health-care-related items. For instance, an over-the-counter medicine such as Tylenol would be eligible for FSA/HRA payment but a tube of toothpaste would not.
Licata advised the first step for retailers that accept FSA/HRA cards is to become a member of SIGIS, which involves a short application process and a modest fee. There are several levels of membership, depending on the degree of involvement that the retailer wishes to have in the organization. Most merchants, according to Licata, are content with a level 4 membership, which gives them access to the SIGIS-approved product list and allows them to display the SIGIS membership logo at the POS.
After becoming a SIGIS member, the retailer downloads the list of health-care items compliant to IIAS standards and works with their POS systems provider to make sure the system is accounting for the additional level of detail required.
“While this may initially look like a burden imposed by the IRS,” explained Licata, “it is important for retailers to understand that the end result will be a much better cardholder experience which translates to happier customers.” Prior to the IIAS requirements, consumers often had to go back and look for store receipts to show that what was charged to an FSA/HRA account were indeed health-care products. As Licata described, it was not a truly paperless environment, and it was a cumbersome, difficult process for consumers.
“Although retailers could create their own solutions for the IIAS requirements, SIGIS has created a single standard with universal acceptance,” said Licata. “We wanted a single standard that guaranteed acceptance of any card, regardless of who issued or processed the card.”
SIGIS membership information for companies that accept and process FSA and HRA cards can be found at the organization’s Web site,