News & Events

NCPA Presentation: SIGIS Executive Director, Jeff Beadle on the impact of new IRS OTC Rule

by Liz Norton | Oct 22, 2010

Patient Protection and Affordable Care Act changes for Flexible Spending Accounts

Your Speaker

  • Jeff Beadle is the Executive Director for Special Interest Group for IIAS Standards (SIGIS)
  • SIGIS is a nonprofit standards organization that develops industry standards to met IRS regulations for the use of debits cards for Flexible Spending Account (FSA) and Health Reimbursement Account (HRA) transactions
  • SIGIS members include Plan Administrators, Issuer Processors, Card Networks (Visa / MasterCard), Acquirer Processors, and Merchants
  • SIGIS represents over 11,000 member companies

Existing Regulations

  • To use a card with FSA or HRAs, Retail locations must substantiate purchases at the point of sale (can apply to HSA transactions too)
  • Two options for card use from the IRS regulations:
    • an “Item Inventory Approval System” (IIAS) or
    • “90% Exemption”
  • Applies to all Mass, Discount, Grocery, Chain Drug, Mail Order and Pharmacy merchants
  • 90% Exemption is only allowed at Chain Drug and Pharmacy locations (substantiated after transaction by consumer)

IIAS Option in Detail

“Item Inventory Approval System” (IIAS)
  • Includes a Point of Sale System that identifies items as eligible at time of consumer purchase
  • Eligible Categories
    • OTC Devices and Supplies (bandages, test strips, blood monitors, eye glasses, etc)
    • OTC Medicines and Drugs that treat a specific medical condition (pain relievers, cold and flu medications, cough drops, etc). NOTE: Effective January 1, 2011, these require an Rx to be eligible under FSAs, HRAs and HSAs.
    • Drugs available only by Prescription
  • OTC items identified on an Eligible Products List (EPL)
  • Purchase considered substantiated at time of sale (merchant maintains receipt detail, consumer has no further requirement)

90% Option in Detail

“90% Exemption”

  • Merchant registers on a list that 90% of goods sold in the prior tax year qualify for reimbursement
  • Merchants must re-attest each year
  • Purchase is not substantiated at time of sale, consumer must substantiate expense to plan administrator
  • Consumer must reimburse plan administrator for any ineligible items

New Regulations

  • Patient Protection and Affordable Care Act (PPACA) required that “OTC Drugs and Medicines (excluding insulin) must be prescribed” to qualify for reimbursement effective 1/1/2011.
  • IRS has confirmed there are no changes to OTC Devices and Supplies
  • IRS has clarified that “prescribed” means an electronic or written order that meets the legal requirements of a prescription by an individual authorized to issue a prescription in accordance with state law, whether or not the drug required a prescription to be dispensed
  • IRS has provided transition period between 1/1/2011 and 1/15/2011 to allow merchants time to update their “lists”
  • IRS has stated incorrectly that IIAS system is "not capable of substantiating in compliance with the [new OTC requirement]”.
    • This will negatively impact IIAS processing merchant locations.
    • SIGIS actively working this issue with the IRS. Comment letter filed last week of September.

Merchant / POS Vendor Actions

90% Locations

  • No changes to current process for Merchant
  • Consumer must turn in prescription for OTC Drugs and Medicines to Plan Administrator with their store receipt unless receipt contains Rx #

IIAS Location

  • Load the new EPL list between 1/1/2011 and 1/15/2011
    • New list will exclude 16,000 OTC Drugs and Medicines (but still contain 26,000+ items)
    • Products reviewed based on Primary Use and eligibility
    • Don’t forget to change any private label or specialty national branded products
  • Additional guidance for processing OTC as a prescription pending SIGIS discussions with the IRS, stay tuned


Questions can be sent to the SIGIS Help Desk

*Be sure to check the SIGIS website for the latest information.