By Pete Uselman
Under IRS guidance, merchants outside certain healthcare categories generally need an Inventory Information Approval System, or IIAS, to accept flexible spending account (FSA), health savings account (HSA), and health reimbursement arrangement (HRA) debit cards.
It’s not simply a matter of routing another transaction within a platform that already accepts credit and debit cards. Instead, the transaction has to determine whether the products being purchased qualify as eligible medical expenses.
For pharmacy management system (PMS) providers supporting pharmacies, retailers, and other merchants that sell FSA/HSA-eligible products, that means connecting inventory, point-of-sale (POS) logic, payment processing, and an industry certification process. For customers, that infrastructure can determine whether using health benefit funds feels like a normal payment experience or an extra hurdle at checkout.
The good news is that PMS providers don’t have to solve every part of that process from scratch. Established standards and certified technology providers create a path from item-level eligibility to an approved transaction. The key is understanding how the pieces fit together, what certification requires, and where merchants still need support to get up and running.
IIAS makes the eligibility decision at checkout
The eligibility check begins when a product is scanned. The POS system compares its inventory information against a list of eligible medical products, then uses that information to calculate the amount that can be paid with an FSA, HSA, or HRA card.
For the customer, much of that complexity can remain behind the scenes. The system identifies eligible items, applies available benefit funds to that portion of the purchase, and leaves the remaining balance for another payment method.
SIGIS, or Special Interest Group for IIAS Standards, maintains the industry standards that make IIAS transactions consistent across merchants, POS providers, acquirers, processors, card issuers, and plan administrators. Under the SIGIS standard, participating merchants use the SIGIS Eligible Product List for nationally branded items, along with separate eligibility criteria for certain private-label and local products. The list is updated monthly to reflect applicable eligibility requirements.
The checkout workflow generally follows four steps:
- Identify eligible products and calculate the eligible subtotal.
- Identify the FSA, HSA, or HRA card and submit the eligible amount for authorization.
- Apply any available benefit-card funds, including a partial authorization when the balance is insufficient.
- Collect payment for non-eligible items or any remaining balance using another payment method.
Consider a customer buying several eligible healthcare products along with shampoo or another non-eligible product. The POS system can authorize the benefit card for the eligible portion of the basket while leaving the remaining amount to another payment method.
This is the mechanism that allows eligible purchases to be substantiated at the point of sale. IRS Notice 2006-69 describes IIAS transactions as fully substantiated without requiring the employee to submit a receipt for further review. It also describes split-tender transactions when only part of a basket qualifies, or the cardholder’s available benefit is insufficient to cover the eligible amount.
For a PMS, that means health card acceptance reaches deeper into the platform than payment authorization. The software needs to understand what is being purchased before it can determine how much of the transaction the benefit card can pay.
SIGIS creates the standard behind the transaction
For many PMS providers, an important part of that ecosystem is becoming a Third-Party Servicer, or TPS.
Under SIGIS requirements, a certified TPS provides and operates three key capabilities for merchant clients: inventory management, POS transaction processing, and payment card processing. The TPS must also use the SIGIS Eligible Product List and support required transaction data retention and retrieval.
Certification validates that the software can execute that workflow correctly. A POS provider seeking TPS certification completes a self-assessment covering its IIAS implementation and technical testing with its acquirer. The acquirer reviews the certification materials and submits them to SIGIS for approval.
Once certified, the TPS appears in the SIGIS-certified POS solutions list, and merchants using the certified system may qualify for a streamlined certification process. For PMS providers, this is significant. Rather than leaving every merchant to solve IIAS implementation independently, the PMS can establish a compliant technical foundation once and provide a repeatable path for eligible merchants that want to accept FSA and HRA cards.
Certification is only half the job
Getting the software certified does not automatically activate health payment card acceptance for every merchant using it. Each merchant still has its own implementation process.
A merchant using the SIGIS certification framework generally needs to become a SIGIS member and select the appropriate certification method. Merchants using a certified TPS solution and a supported acquirer can apply for SIGIS’s simplified TPS Merchant certification.
The merchant’s path to go-live involves these distinct steps:
- The merchant joins SIGIS and completes the appropriate certification application.
- The POS provider and payment processor review the required information.
- Once the submission is approved, the processor coordinates the necessary card-network setup before the merchant begins accepting transactions.
The technical foundation may already be in place through a certified TPS, but somebody still has to guide the merchant through those remaining steps. The challenge is knowing what needs to happen next, who owns it, and whether an application has stalled somewhere along the way.
That makes implementation support an important consideration when PMS providers evaluate payment partners. A processor may technically support IIAS while leaving merchants to navigate much of the certification process themselves. A partner experienced with the process can instead provide clear instructions, review submissions, follow up on outstanding steps, and work toward a defined go-live date.
The ‘90% Rule’ is an exception with tradeoffs
Some pharmacies and drug stores have another option. Under IRS Notice 2007-2, qualifying drug store and pharmacy locations may accept FSA, HSA, and HRA debit cards without implementing IIAS when at least 90% of the store’s gross receipts during the prior taxable year consist of qualifying medical expenses. SIGIS maintains a 90% Rule registration program for eligible drug store and pharmacy merchant categories.
Because the 90% Rule bypasses IIAS, the merchant does not need an IIAS-capable application to qualify. That gives pharmacies more flexibility in their software choice, but it comes with two important tradeoffs:
- Transactions are not automatically substantiated through IIAS. Plan administrators generally have to follow their normal substantiation procedures, which can mean asking cardholders to provide receipts after the transaction. SIGIS explains this distinction in its guidance for plan administrators.
- Acceptance is not guaranteed. While many plan administrators permit FSA and HRA cards at registered 90% Rule merchants, some plans require IIAS-based substantiation and may decline the transaction. SIGIS identifies this as a potential reason for declines in its 90% Rule registration FAQs.
These tradeoffs make the rule useful as an exception, but not necessarily the best architecture for a PMS to design around. Where a merchant can use an IIAS-capable TPS, the result can be a more predictable payment and substantiation experience. Those differences can be visible to the customer, whether through a declined card at checkout or a later request for documentation of the purchase.
PMS providers need to design for transaction exceptions
Certification establishes that the infrastructure meets the standard, but it does not guarantee that every transaction will be approved. Cards can still be declined because of insufficient funds, inactive accounts, or plan-specific requirements. SIGIS’s list of common decline reasons identifies these issues, along with circumstances involving prescription amounts and partial authorization. Even a fully certified IIAS solution may encounter benefit plans that require transaction information beyond what the standard supports. These plan-specific requirements can prevent acceptance despite certification.
That is why the checkout experience needs to account for exceptions. Partial authorization, split tender, and clear handling of non-eligible items help customers complete purchases when the initial authorization cannot cover the entire basket. SIGIS recommends supporting partial authorization, prescription amount information, and non-eligible items when implementing IIAS to maximize authorization rates.
From the customer’s perspective, these exception-handling capabilities can be as important as the initial authorization. They provide a clear way to finish the purchase when a benefit card covers only part of the transaction.
Health payment card acceptance is a workflow, not a checkbox
For PMS providers serving pharmacies, retailers, and other eligible merchant categories, health payment card acceptance is an opportunity to support a payment need that extends beyond traditional card processing. The value comes from making the entire process work. This includes accurate item-level eligibility, reliable split-tender handling, certified technology, and clear merchant onboarding, all of which contribute to a better acceptance experience.
Ultimately, effective FSA acceptance comes down to making the payment experience as straightforward as possible. Reliable eligibility checks, clear split-tender handling, and a smooth implementation process can help merchants support these transactions with less friction and give customers greater confidence at checkout.
References
Internal Revenue Service. (2006). Internal Revenue Bulletin: 2006-31.
Internal Revenue Service. (2007). Notice 2007-2: Amounts received under accident and health plans.
Special Interest Group for IIAS Standards. (n.d.). 90% registration.
Special Interest Group for IIAS Standards. (n.d.). Eligible product list overview.
Special Interest Group for IIAS Standards. (n.d.). IIAS certification.
Special Interest Group for IIAS Standards. (n.d.). Plan administrators.
Special Interest Group for IIAS Standards. (n.d.). POS vendors.
