The IRS notice 2006-69 clarifies that the health care debit card can only be used at merchants with health care merchant category codes (MCC). If a non health care merchant has the Inventory Information Approval System (IIAS), a list of inventory items that are an eligible medical expense, and they process the transaction as split tender, so that only the eligible medical expense items are paid for by the health care debit card, and another method of payment is required for all other items, then the card can be used at non health care merchants.

What is a health care merchant category code? The IRS has described a health care merchant as a merchant that dispenses mostly medicines, drugs (informal comments made by the IRS during a teleconference with ECFC, approximately 99% medicines), ought to be a health care merchant. The card associations, such as MasterCard and Visa determine if the merchant is a health care merchant or a grocery store or a discount store merchant, etc. MasterCard has labeled Discount stores such as Target and Walmart and grocery stores, such as, Kroger and Publix that have a license to dispense drugs as non health care merchants. So if these merchants do not have the Inventory Information Approval System in place, the debit cards can not be used there.

Since Notice 2006-69 was published, it appears that Target stores have updated their Point of Sale as Pharmacy MCC 5912. So far purchases at Target stores in 28 states have been made under the Pharmacy MCC.

There continues to be a lot of conversations with the IRS in regards to this guidance. We will keep you updated on any further guidance from the IRS.