IIAS Regulations, SIGIS, FSA Cards and What They Mean to Your Business


In 2007, the IRS mandated that to continue to accept flexible spending cards, an Inventory Information Approval System had to be in place beginning January 1, 2008 for all retail stores that did not fall under the Merchant Category Codes (MCC) that define typical drug stores and pharmacies. This meant that the larger retailers including supermarket and warehouse chains had to have an IIAS system in place by the first of January 2008 or risk losing business to independent drug stores.

The IRS mandated that typical drug stores and pharmacies that fell under MCC 5912 (and a few other similar codes) had to have an IIAS system in place by January 1, 2009 if they want to continue to accept flexible spending cards (continuing to compete with the supermarket and warehouse chains). [The one exception to the ruling is discussed later in this document.] This one-year grace period gave the POS software providers and the pharmacy community a chance to get a system in place that would meet the IRS requirements.

Freedom Data Systems and other POS vendors in the pharmacy industry worked on solutions for this IRS mandate for up to a year prior to the deadline and the associated credit card gateways and processing companies were also working on their end to get everything in place. This was a huge undertaking as all kinds of certification processes need to be completed by various vendors.

Currently in the Industry

Today, pharmacy and drug stores that fall under MCC 5912 (and others) are able to process flexible spending cards just like they process a credit card. POS vendors, credit card gateways and processors are continuing their efforts on the necessary certifications. New recommendations and industry standards continue to be released, including a revised EPL (Eligible Product List) where many medicine type items were removed and are now unavailable for purchase with a flexible spending card unless filled as a prescription. Pharmacies that do not have an IIAS system in place and have not been classified as a 90% merchant with their credit card processor will have flexible spending cards declined when swiped through their systems. Currently, there is no way to have an IIAS system in place without a POS system. The third party card swipes that reside beside electronic cash registers are still not IIAS compliant.

IIAS Exemption

There is one exemption to the IIAS ruling. The IRS has indicated that if 90% or more of your total sales for the previous year were qualified products then you do not have to have an IIAS system and you will still be able to accept flexible spending cards. Many pharmacies and drug stores fall under this ruling.

Under the 90% rule you will be able to process flexible spending cards but your customers will still need to retain the receipts and possibly have to send them into their plan administrator for substantiation.

Can you Afford to Lose business?

Currently, the large chains and wholesale clubs are continuing to aggressively market to customers who use flexible spending cards. They are convincing customers who do not know the regulations they have to use their flexible spending cards at particular locations. This is being done through co-branding of cards and the use of other marketing tools. If you are IIAS compliant, educate your customers and let them know that you can accept their HRA or HAS cards.

Now is the Time to Act!

Studies in human behavior indicate that most people will take the path of least resistance. These days, families are juggling two careers and running kids to baseball practice, soccer games, or dance class. As the marketing tools in use by stores who have IIAS-compliant POS systems reaches the general public—which is already happening—existing and potential customers will use their flexible spending cards at locations where they do not have to deal with paperwork. We believe this to be the plain, simple truth. Pharmacies that cannot accept flexible spending cards will very likely see their business decline as the use of these cards increases.

The bottom line is can you afford not to accept these cards at your pharmacy?