The short answer
Under IRS Notice 2007-2, health FSA and HRA debit cards may not be used after December 31, 2007 at a merchant without a health care related merchant category code unless the merchant has implemented an inventory information approval system (IIAS) described in Notice 2006-69. After December 31, 2008, stores with the Drug Stores and Pharmacies merchant category code also need an IIAS unless, store by store, 90 percent of the prior year's gross receipts were for qualifying medical care items. This is general information, not tax advice.
Read this first
Not tax advice or legal advice. This page is general information dated September 17, 2026. It summarizes IRS Notice 2006-69, IRS Notice 2007-2 and IRS Publication 969 (2025). Whether a particular item qualifies, and how a benefit plan substantiates claims, is decided by the plan and its administrator under IRS rules. Confirm your setup with your processor, your POS provider and a tax professional. CELER Merchants is an independent merchant services agent, not a tax adviser.
What these cards are
Health flexible spending arrangements (health FSAs) and health reimbursement arrangements (HRAs) are employer plans, and IRS Publication 969 says debit cards, credit cards and stored value cards given by an employer can be used to reimburse participants. A health savings account (HSA) is different: Publication 969 says HSA distributions include amounts paid with a debit card, and that the account holder must keep records sufficient to show the distributions were exclusively to pay or reimburse qualified medical expenses. The IIAS and 90 percent rules below come from IRS notices about health FSA and HRA cards.
Why your merchant category code matters
Revenue Ruling 2003-43, as described in Notice 2006-69, covers cards whose use is limited to merchants and service providers with merchant category codes related to health care, such as physicians, pharmacies, dentists, vision care offices, hospitals and other medical care providers. Your merchant category code (MCC) is assigned when your account is set up, so check that it describes your business accurately. See our guide to merchant category codes.
What an IIAS does
Notice 2006-69 describes the inventory information approval system. When the card is used, the merchant's system collects information about the items purchased using inventory control information such as SKUs, and compares it against a list of items that qualify as medical care under Internal Revenue Code section 213(d), including nonprescription medications. The system approves the card only for the qualifying amount the plan covers. If only part of the sale is approved, the customer pays the rest another way, which the notice calls a split-tender transaction. The notice says card transactions using this method are fully substantiated without the employee submitting a receipt, and that attempts to use the card at non-participating merchants without a health care merchant category code would be rejected.
| Merchant type | What the notice says | Date |
|---|---|---|
| Merchants without a health care related merchant category code (for example supermarkets, grocery stores, discount stores, wholesale clubs) | Health FSA or HRA debit cards may not be used unless the merchant has implemented an inventory information approval system as described in Notice 2006-69. | After December 31, 2007 |
| Stores with the Drug Stores and Pharmacies merchant category code | Cards may not be used unless the store participates in the inventory information approval system, or, store location by store location, 90 percent of the store's gross receipts in the prior taxable year were items that qualify as medical care under section 213(d). | After December 31, 2008 |
| Mail order and web-based vendors that sell prescription drugs | Treated as an other medical care provider only for debit card transactions during the transition relief period. | On or before December 31, 2007 |
The 90 percent rule in plain terms
Notice 2007-2 says many stores coded as drug stores and pharmacies also sell a significant number of items that are not medical expenses. For those stores, the IRS requires either IIAS participation or the 90 percent test. The test is applied store location by store location, and looks at the prior taxable year's gross receipts. Items that qualify under section 213(d) count toward the 90 percent, including nonprescription medications as described in Revenue Ruling 2003-102. If you run a pharmacy, check which route your acquirer and card programs expect you to use.
What counts as a qualified expense
Publication 969 (2025) says, for health FSAs, qualified medical expenses are those specified in the plan that would generally qualify for the medical and dental expenses deduction, and that over-the-counter medicine (whether or not prescribed) and menstrual care products are considered medical care. IRS Publication 502 defines medical expenses as the costs of diagnosis, cure, mitigation, treatment or prevention of disease, and for the purpose of affecting any part or function of the body. Your store does not decide what a plan covers; the plan and its administrator do.
Checklist before you promote HSA and FSA acceptance
1. Confirm your merchant category code with your processor. 2. If you are not a health care merchant, ask whether your POS and processor support an IIAS and how qualifying items are flagged at the SKU level. 3. Test a mixed basket to confirm the terminal supports split tender. 4. If you use the Drug Stores and Pharmacies code, ask how the 90 percent test or IIAS participation is documented for each location. 5. Train staff to ask for another payment method when a card is partially approved. 6. Keep itemized receipts available, since account holders and plans need records.
Key takeaways
- IIAS and 90 percent rules come from IRS Notices 2006-69 and 2007-2 on health FSA and HRA cards.
- Without a health care merchant category code, an IIAS is required for health FSA and HRA card use (after December 31, 2007).
- Drug stores and pharmacies need an IIAS or to meet the 90 percent test, location by location (after December 31, 2008).
- An IIAS approves only qualifying items and leaves the rest for split tender.
- Not tax advice; confirm with your processor, POS provider and a tax professional.
Related guides
- Medical Practices: Collecting Patient Balances Faster
- Merchant Category Codes (MCC): What Merchants Should Know
- Level II and III Card Data: How B2B Interchange Works
- PCI Compliance for Small Businesses: A Plain Guide
- New Business Card Payments: A First 90 Days Checklist
- Cash-Only to Cards: The Rules That Start Applying
- Pharmacy Payment Processing: Cards at the Counter
Sources
- IRS Notice 2006-69 (debit cards used to reimburse participants in self-insured medical reimbursement plans) (checked 2026-09-17)
- IRS Notice 2007-2 (transition relief; Drug Stores and Pharmacies merchant category code) (checked 2026-09-17)
- IRS Publication 969 (2025), Health Savings Accounts and Other Tax-Favored Health Plans (checked 2026-09-17)
- IRS Publication 502, Medical and Dental Expenses (checked 2026-09-17)
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