Flexible Spending Account Substantiation Mandate

Beginning July 1, 2009, IRS Notice 2008-104 mandated the auto-substantiation of Medical FSA and Health Reimbursements Accounts debit card transactions at pharmacies. 

Auto substantiation refers to the use of an Inventory Information Approval System (IIAS) to isolate eligible healthcare expenses. Eligible healthcare items purchased at a pharmacy that have implemented an IIAS will be substantiated at the point-of-service expenses. The IRS did give merchants a grace period thru December 31, 2009 to comply with the Inventory Information Approval System (IIAS).

This requirement may feel burdensome for employees using the debit cards at pharmacies that haven’t implemented the IIAS system, but will in the long run reduced the dreaded “pay and chase” events for third party administrators, will decrease participant fraud in your programs and reduce financial risk.

Two Levels of IIAS Auto-Substantiation

Healthcare Eligible Total (HET) Each card terminal at an IIAS merchant will “break down” the items purchased and categorize the expense as either healthcare eligible or non-healthcare.  The Healthcare Total is defined as all IRS Section 213(d) expenses (all Medical FSA eligible items).  All non-healthcare products will be declined at the point of sale and will require the customer to use a different form of payment other than the Flex debit card.

Prescription Subtotal (Rx-Only) many pharmacies will implement a higher level of IIAS that will separate the HET into two categories: Medical Over-the-Counter (OTC) and Prescription Rx. Even though this higher-level IIAS system is not mandated, it will facilitate administration for many prescription-only HRA plans.

If your pharmacy is hasn’t implemented the IIAS system your debit card will not be accepted.  A special interest group has been formed for IIAS Standard.  I have attached a list of Compliant IIAS Merchants click here.

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