Inventory information approval system
Encyclopedia
The Inventory Information Approval System, or IIAS, is a point-of-sale technology used by retailers that accept FSA debit card
s, which are issued for use with medical flexible spending account
s (FSAs), health reimbursement accounts
(HRAs), and some health savings account
s (HSAs) in the United States.
By the end of 2007, all grocery stores, discount stores, and online pharmacies that accept FSA debit cards must have an IIAS; by the end of 2008, most chain pharmacies must have an IIAS as well.
The predecessor to the current IIAS was developed by the online retailer drugstore.com
for its "FSA store" in 2005; it was first introduced to brick-and-mortar retailing by Walgreens
in 2006. Wal-Mart
became the first discounter with an IIAS in late 2006.
scanners in the 1970s to separate items eligible for purchase under the Food Stamp Program
from those that are not eligible. Every item in the grocery store's database is flagged "yes" or "no" for food-stamp eligibility; the scanner automatically keeps a separate total for food-stamp items. In the beginning, the cashier pressed a special "food-stamp total" key, and the customer presented paper food stamps; today, the customer swipes an Electronic Benefit Transfer
(EBT) card and selects the "food stamp" account, and the register charges only the food-stamp total to the EBT card. The remaining balance must be paid for by other means.
IIAS works in much the same way, but with medical FSAs, HRAs, or HSAs instead of food stamps: (Usually, the term "FSA" is used to cover all of them; HRAs, HSAs, and non-medical FSAs are relatively rare, and HSAs can also have regular debit card
s though many of them have FSA debit cards instead.)
IIAS does have one additional requirement that is not normally found with food stamps, though the U.S. Department of Agriculture can audit
retailers directly for similar purposes: Beginning January 1, 2007, the merchant must make a record of each transaction available to the employer, or more commonly, to the employer's FSA or HRA provider. This can be done contemporaneously with the transaction, or it may be provided later if the Internal Revenue Service
ever audits the employer.
The terminology used by the IRS in its descriptions of IIAS may seem unusual at first. This stems from the history of IIAS, as it was first developed by an online retailer (drugstore.com) and only later adapted to brick-and-mortar retailing. For example, IIAS is described by the IRS as an "inventory control" system tied to SKUs
; but it's generally easier to understand as it was implemented by Walgreens and Wal-Mart, i.e., as a point-of-sale system tied to UPC
s.
until July 2006, in IRS Notice 2006–69. At the same time, the IRS decided to crack down on FSA/HRA providers that were not following prior IRS guidance on FSA debit cards. As part of this, the IRS decided that grocery and discount stores would not be allowed to accept FSA debit cards unless they installed an IIAS; they decided it would be too easy to misuse the cards if they could be used at grocers and discounters for anything they sold, even if the grocer or discounter also had a pharmacy. However, they permitted stand-alone chain or independent pharmacies (known as "true pharmacies") to accept the card without an IIAS.
Grocers and discounters immediately challenged the IRS ruling, claiming that their pharmacies were being discriminated against, and that since most "true pharmacies" sold ineligible goods as well, the risk from them was just as great. Therefore, two changes were made by IRS Ruling 2007–02 in December 2006:
Most major pharmacy chains report that 60–65% of their sales come from the pharmacy; therefore, OTC would have to account for 25–30% of their total sales for them to qualify, which is unlikely—especially since each individual pharmacy must qualify separately. Therefore, only independent pharmacies are likely to qualify for the exemption.
Because of this ruling, by 2009 most grocers, discounters, and chain or Internet pharmacies in the U.S. must have an IIAS in place in order to accept FSA debit cards.
Since IIAS eliminates many of the roadblocks that previously existed for use of medical FSAs at retailers (especially for OTC items), it is hoped that it will lead to increased enrollment in medical FSAs.
FSA debit card
An FSA Debit Card is a special type of debit card issued in the United States to access tax-favored spending accounts such as flexible spending accounts and health reimbursement accounts , and sometimes health savings accounts as well. All such cards to date bear the Visa, MasterCard, or...
s, which are issued for use with medical flexible spending account
Flexible spending account
A flexible spending account , also known as a flexible spending arrangement, is one of a number of tax-advantaged financial accounts that can be set up through a cafeteria plan of an employer in the United States...
s (FSAs), health reimbursement accounts
Health Reimbursement Account
Health Reimbursement Accounts or Health Reimbursement Arrangements are Internal Revenue Service -sanctioned programs that allow an employer to set aside funds to reimburse medical expenses paid by participating employees...
(HRAs), and some health savings account
Health savings account
A health savings account is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a high-deductible health plan . The funds contributed to an account are not subject to federal income tax at the time of deposit. Unlike a flexible spending account...
s (HSAs) in the United States.
By the end of 2007, all grocery stores, discount stores, and online pharmacies that accept FSA debit cards must have an IIAS; by the end of 2008, most chain pharmacies must have an IIAS as well.
The predecessor to the current IIAS was developed by the online retailer drugstore.com
Drugstore.com
Drugstore.com is an Internet retailer in health and beauty care products headquartered in Bellevue, Washington. Its web operations were launched on February 24, 1999....
for its "FSA store" in 2005; it was first introduced to brick-and-mortar retailing by Walgreens
Walgreens
Walgreen Co. , doing business as Walgreens , is the largest drugstore chain in the United States of America. As of August 31st, the company operates 8,210 locations across all 50 states, the District of Columbia and Puerto Rico. Founded in Chicago, Illinois in 1901, and has since expanded...
in 2006. Wal-Mart
Wal-Mart
Wal-Mart Stores, Inc. , branded as Walmart since 2008 and Wal-Mart before then, is an American public multinational corporation that runs chains of large discount department stores and warehouse stores. The company is the world's 18th largest public corporation, according to the Forbes Global 2000...
became the first discounter with an IIAS in late 2006.
How IIAS works
IIAS is similar to the system used by grocery stores ever since they introduced the first barcodeBarcode
A barcode is an optical machine-readable representation of data, which shows data about the object to which it attaches. Originally barcodes represented data by varying the widths and spacings of parallel lines, and may be referred to as linear or 1 dimensional . Later they evolved into rectangles,...
scanners in the 1970s to separate items eligible for purchase under the Food Stamp Program
Food Stamp Program
The United States Supplemental Nutrition Assistance Program , historically and commonly known as the Food Stamp Program, is a federal-assistance program that provides assistance to low- and no-income people and families living in the U.S. Though the program is administered by the U.S. Department of...
from those that are not eligible. Every item in the grocery store's database is flagged "yes" or "no" for food-stamp eligibility; the scanner automatically keeps a separate total for food-stamp items. In the beginning, the cashier pressed a special "food-stamp total" key, and the customer presented paper food stamps; today, the customer swipes an Electronic Benefit Transfer
Electronic Benefit Transfer
Electronic Benefit Transfer is an electronic system in the United States that allows state governments to provide financial and material benefits via a plastic debit card. Common benefits provided via EBT are typically sorted into two general categories: Food and cash benefits...
(EBT) card and selects the "food stamp" account, and the register charges only the food-stamp total to the EBT card. The remaining balance must be paid for by other means.
IIAS works in much the same way, but with medical FSAs, HRAs, or HSAs instead of food stamps: (Usually, the term "FSA" is used to cover all of them; HRAs, HSAs, and non-medical FSAs are relatively rare, and HSAs can also have regular debit card
Debit card
A debit card is a plastic card that provides the cardholder electronic access to his or her bank account/s at a financial institution...
s though many of them have FSA debit cards instead.)
- Every item in the store's scanner database is flagged "yes" or "no" for FSA eligibility. (This flag is obviously separate from the one for food stamps, if there is one.)
- Prescription drugs are usually not in the main scanner database (though they may be made scannable by tying the pharmacy system into the scanners), but they are almost always FSA-eligible; therefore, the pharmacy department is often categorically flagged as FSA-eligible, the only department to be so treated. (In contrast, multiple departments of most grocery stores are categorically flagged as food-stamp eligible, including the meat, produce, and dry-grocery departments.)
- At checkout, the scanner (for brick-and-mortar retailers) or shopping cartShopping cart softwareShopping cart software is software used in e-commerce to assist people making purchases online, analogous to the American English term 'shopping cart'...
(for online retailers) keeps a separate total for those items that are "FSA-eligible". - If an FSA debit cardFSA debit cardAn FSA Debit Card is a special type of debit card issued in the United States to access tax-favored spending accounts such as flexible spending accounts and health reimbursement accounts , and sometimes health savings accounts as well. All such cards to date bear the Visa, MasterCard, or...
is presented for payment, the scanner or shopping cart will charge the card, but for no more than the "FSA-eligible" total. - If there are other items in the order (or if the FSA debit card did not pay for all eligible items), the scanner or shopping cart then demands another form of payment, such as cashCashIn common language cash refers to money in the physical form of currency, such as banknotes and coins.In bookkeeping and finance, cash refers to current assets comprising currency or currency equivalents that can be accessed immediately or near-immediately...
, checkChequeA cheque is a document/instrument See the negotiable cow—itself a fictional story—for discussions of cheques written on unusual surfaces. that orders a payment of money from a bank account...
, credit card or debit cardDebit cardA debit card is a plastic card that provides the cardholder electronic access to his or her bank account/s at a financial institution...
, to pay for the remaining items.
IIAS does have one additional requirement that is not normally found with food stamps, though the U.S. Department of Agriculture can audit
Audit
The general definition of an audit is an evaluation of a person, organization, system, process, enterprise, project or product. The term most commonly refers to audits in accounting, but similar concepts also exist in project management, quality management, and energy conservation.- Accounting...
retailers directly for similar purposes: Beginning January 1, 2007, the merchant must make a record of each transaction available to the employer, or more commonly, to the employer's FSA or HRA provider. This can be done contemporaneously with the transaction, or it may be provided later if the Internal Revenue Service
Internal Revenue Service
The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...
ever audits the employer.
The terminology used by the IRS in its descriptions of IIAS may seem unusual at first. This stems from the history of IIAS, as it was first developed by an online retailer (drugstore.com) and only later adapted to brick-and-mortar retailing. For example, IIAS is described by the IRS as an "inventory control" system tied to SKUs
Stock Keeping Unit
→A stock-keeping unit or SKU is a number or code used to identify each unique product or item for sale in a store or other business.It is a unique identifier for each distinct product and service that can be purchased...
; but it's generally easier to understand as it was implemented by Walgreens and Wal-Mart, i.e., as a point-of-sale system tied to UPC
Universal Product Code
The Universal Product Code is a barcode symbology , that is widely used in North America, and in countries including the UK, Australia, and New Zealand for tracking trade items in stores. Its most common form, the UPC-A, consists of 12 numerical digits, which are uniquely assigned to each trade item...
s.
IRS requirements to use IIAS
Though IIAS was first used in 2005, it was not officially approved by the Internal Revenue ServiceInternal Revenue Service
The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...
until July 2006, in IRS Notice 2006–69. At the same time, the IRS decided to crack down on FSA/HRA providers that were not following prior IRS guidance on FSA debit cards. As part of this, the IRS decided that grocery and discount stores would not be allowed to accept FSA debit cards unless they installed an IIAS; they decided it would be too easy to misuse the cards if they could be used at grocers and discounters for anything they sold, even if the grocer or discounter also had a pharmacy. However, they permitted stand-alone chain or independent pharmacies (known as "true pharmacies") to accept the card without an IIAS.
Grocers and discounters immediately challenged the IRS ruling, claiming that their pharmacies were being discriminated against, and that since most "true pharmacies" sold ineligible goods as well, the risk from them was just as great. Therefore, two changes were made by IRS Ruling 2007–02 in December 2006:
- Grocers and discounters are allowed to keep accepting the cards until December 31, 2007; this was to give them sufficient time to install an IIAS.
- "True pharmacies" are required to install an IIAS after June 30, 2009, unless at least 90% of the individual pharmacy's sales are of "FSA-eligible" items, i.e., prescription drugs or over-the-counterOver-the-counter drugOver-the-counter drugs are medicines that may be sold directly to a consumer without a prescription from a healthcare professional, as compared to prescription drugs, which may be sold only to consumers possessing a valid prescription...
(OTC) items.
Most major pharmacy chains report that 60–65% of their sales come from the pharmacy; therefore, OTC would have to account for 25–30% of their total sales for them to qualify, which is unlikely—especially since each individual pharmacy must qualify separately. Therefore, only independent pharmacies are likely to qualify for the exemption.
Because of this ruling, by 2009 most grocers, discounters, and chain or Internet pharmacies in the U.S. must have an IIAS in place in order to accept FSA debit cards.
Importance of IIAS
In addition to the above IRS requirements, IIAS is important in promoting the use of tax-favored health accounts, especially FSAs (which are usually set up by employees), for these reasons:- While other IRS-approved "auto-adjudication" systems for electronic substantiation of FSA debit cardFSA debit cardAn FSA Debit Card is a special type of debit card issued in the United States to access tax-favored spending accounts such as flexible spending accounts and health reimbursement accounts , and sometimes health savings accounts as well. All such cards to date bear the Visa, MasterCard, or...
charges are geared towards health plan expenses, such as copay matching or electronic transmittal of explanations of benefits, IIAS is the only one that is designed for use with over-the-counter drugOver-the-counter drugOver-the-counter drugs are medicines that may be sold directly to a consumer without a prescription from a healthcare professional, as compared to prescription drugs, which may be sold only to consumers possessing a valid prescription...
s and similar items (OTC) as well as prescription drugs. - IIAS is the first system with 100% "auto-adjudication" of an entire class of FSA debit card charges that has been widely adopted by the FSA industry. A few FSA vendors had previously used proprietary systems which provided 100% auto-adjudication of prescription charges thru a pharmacy benefits managerPharmacy Benefit ManagementIn the United States, a Pharmacy Benefit Manager is a third party administrator of prescription drug programs. They are primarily responsible for processing and paying prescription drug claims. They also are responsible for developing and maintaining the formulary, contracting with pharmacies,...
, but they ran into numerous technical and educational issues and were not adaptable to OTC. - Some of the IRS rules on what OTC items are and are not eligible for FSAs have proven rather arcane in practice; for example, condomCondomA condom is a barrier device most commonly used during sexual intercourse to reduce the probability of pregnancy and spreading sexually transmitted diseases . It is put on a man's erect penis and physically blocks ejaculated semen from entering the body of a sexual partner...
s are OK since they prevent pregnancy, but K-Y JellyK-Y JellyK-Y Jelly is a water-based, water-soluble personal lubricant produced by Johnson & Johnson. According to the company, "The origins of the brand name 'K-Y' are unknown...
is not if it is used to lubricate them. IIAS effectively manages this problem by verifying eligibility of each OTC item at point-of-sale. - Both paper claims and manual substantiation of FSA debit card charges often required the submission of receipts with "full names" of OTC items; but many stores abbreviate item names in such a way that it is almost impossible to tell if the item is eligible or not. Also, most providers did not reimburse sales taxSales taxA sales tax is a tax, usually paid by the consumer at the point of purchase, itemized separately from the base price, for certain goods and services. The tax amount is usually calculated by applying a percentage rate to the taxable price of a sale....
on paper claims with "mixed" FSA/non-FSA receipts because they could not "split" the tax line item without being versed in the sales tax laws of every state and locality in the U.S., a near impossibility. IIAS avoids this by having the retailer itself verify item eligibility and "split" the sales tax. - The process of demanding receipts or reimbursement for FSA debit card charges that are not "auto-adjudicated", known as "pay and chase" in the industry (a term recognized by the IRS in Notice 2007-02), proved particularly cumbersome for OTC items due to the lack of "auto-adjudication" systems and the high potential for fraudulent or erroneous charges; IIAS eliminates this by providing an "auto-adjudication" system for OTC while preventing many fraudulent or erroneous charges at retailers.
Since IIAS eliminates many of the roadblocks that previously existed for use of medical FSAs at retailers (especially for OTC items), it is hoped that it will lead to increased enrollment in medical FSAs.