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IRS Bulletin 2007-02

IRS Clarifies Rules for Permitting FSA and HRA Debit Cards to be Used at Drug Stores and Pharmacies

As explained in a previous article, drugs stores and pharmacies must take additional steps to continue to allow the use of Flexible Spending Account (FSA) and Health Reimbursement Account (HRA) debit cards. Following is additional information regarding this matter.

IRS Bulletin 2007-2 required merchants that sell qualified medical expense goods and services (but that do not have healthcare merchant codes) to have an Inventory Information Approval System (IIAS) in place by January 1, 2008. This ruling does not affect HSA debit cards. This IIAS would identify at the register via the barcode the items that are health expenses eligible under Section 213(d).

After June 30, 2009, FSA and HRA debit cards may not be used at a drug store or pharmacy unless (1) the store participates in an IIAS to substantiate eligible charges, or (2) on an individual store location basis, 90% of the store's gross receipts during the prior taxable year consisted of eligible medical care expenses under Section 213(d) (the "90% Rule"). The IRS considers a store to be a drug store or pharmacy if it is assigned a drug store and pharmacy merchant category code.

What is the 90% Rule?
The 90% Rule states that, on a store-location by store-location basis, 90% of the store's gross receipts during the prior taxable year must have consisted of items that qualify as reimbursable medical expenses under Section 213(d) (including over-the-counter eligible healthcare items).

How are health plans and members affected by this IRS Bulletin?
If a drug store or pharmacy does not comply with either of the above requirements by June 30, 2009, FSA and HRA debit cards may not be used at such stores for eligible health plan medical expenses. For debit cardholders, if a transaction is attempted at a drug store or pharmacy that does not either comply with IIAS or is not registered under the 90% Rule, the transaction will be declined and another form of payment will be required.

Why has the IRS issued this ruling?
Since stores with the merchant category code for drug stores and pharmacies also sell a significant number of items that do not qualify as eligible medical expenses under Section 213(d), the IRS implemented this Bulletin to curtail the ability to purchase non-medical items with FSA and HRA debit cards. The IRS issued this Bulletin to require substantiation of Section 213(d) medical expenses purchased using FSA and HRA debit cards.

When is compliance required?
Compliance is required by July 1, 2009. Each client with a Meritain Health debit card account is being analyzed to identify potential drug store and pharmacy merchants (merchant code 5912) that may be affected. If your Client Relationship Manager has not reached out to you, please contact them for further information on plan participants affected by this change.

Debit cardholders can view the list of merchants that currently comply with IIAS prior to making a transaction to ensure their card will be accepted and that no substantiation will be required. Debit cardholders may also view the list of merchants that are currently registered under the 90% Rule. Debit cards will work at these merchants, but follow-up substantiation will be required. Both lists are available at www.sigis.com.