The IRS Notice 2006-69 allows for auto-adjudication for an additional category of claims under the merchant based inventory information approval system (IIAS).  As described below, under such an arrangement, a real-time determination is made by the merchant at the point of sale of the amount of eligible medical expenses by comparing the selected items to a pre-approved list.    No additional substantiation is required if a merchant compares the item or items to a pre-determined list maintained by the merchant of items sold by the merchant that constitute Code Section 213(d) expenses and restricts use of the Card only to those items that fall on that list.  However, as noted below, the employer (or its TPA) must have access to claims level detail provided at the time of the transaction or a later date. 

The IIAS system approves the use of the Card only for eligible medical care expenses; when a transaction is not approved in full, the employee must tender additional amounts, resulting in a split-tender transaction. 

 Transition Relief for Certain Merchants Under Notice 2007-02

The IRS issued transition relief treating certain merchants (all supermarkets, grocery stores, discount stores, and wholesale clubs, as well as certain mail order and web based retailers that sell prescription drugs) as merchants with a health care related merchant category code for 2007.  The normal electronic card substantiation rules (including pay and chase) apply during this time.  Then, beginning January 1, 2008, these merchants will need to have a health care MCC or use an IIAS system as described in the 2006-69 Notice.  Also after December 31, 2008 all merchants that have a pharmacy or drug store MCC must use an IIAS unless, unless on a location by location basis, they sell 90% by gross receipts of medical qualifying items. 

Prior to implementation of a compliant IIAS system, several requirements must be satisfied:

1. The Approved List:  The merchant must establish and maintain a list of items that it sells that qualify as Section 213(d) medical expenses.                
2. Inventory Flagging:  The merchant must have the system capability to apply the list to items attempted to be purchased by the Cardholder real time to ensure that SKU numbers (or other inventory tracking criteria) are flagged to indicate status as an eligible medical expense.                
3. The Electronic Card System Requirements:  The merchant must ensure that its electronic card system can identify cards that are restricted to medical expenses, and that “split-tender” transactions can be correctly handled.              
4. Record Keeping:  The plan must ensure that claims-level records are maintained to satisfy the record keeping requirements specified in Rev. Proc. 98-25. 

An industry wide group was formed to determine a uniform methodology for implementing IIAS.  The group consists of DataPath and other major card vendors; the 3 card networks; Discount Stores; Association representing national grocers; an Association of Pharmacies; Bank processors and Acquiring banks.

The group has identified some of the items to be standardized:

•         A standard way of processing authorizations;

•         Standardization of data retention and retrieval;

•         Merchant certification standards;

•         Maintaining a list of eligible items;

Benefits of such standards mean that in addition to simply being able to continue to use health care cards at non-health care merchants, the market is rapidly moving forward with a new means of auto-substantiation of card transactions. Many merchants will be signed up and will be running IIAS systems prior to 1/1/08.  Because a standard will be in place, additional merchants can comfortably adopt an IIAS at any time with out having to work out specific interfaces with multiple card vendors.  Pharmacies will likely adopt the standard prior to their 1/1/09 deadline. 

Click here for the latest list of merchants who have adopted the IIAS.