Definition of Inventory Information Approval System

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What is the Inventory Information Approval System?

The Inventory Information Approval System (IIAS) standard is a Internal Revenue Service-approved inventory management standard that allows merchants such as grocery and drug stores to automatically identify whether a particular product in their inventory is a flexible spending account (FSA) or Health Reimbursement Arrangements (HRAs)-eligible expense. When an employee uses a payment card at one of these merchants, the IIAS allows the card’s processing system to determine which item is eligible, and automatically approves (“autosubstantiates”) or declines the purchase of that item with FSA or HRA funds.

Purchases made with an FSA or HRA card that are not already identified by an IIAS, or at a merchant that has not implemented an IIAS, may require manual substantiation by the cardholder.

Why is the Inventory Information Approval System important to a small business?

The IIAS standard allows for employees who are enrolled in an FSA or HRA to purchase eligible products from merchants that are IIAS-certified.

An FSA allows eligible employees to set aside pre-tax money through payroll deductions into a tax-free account and use these funds to pay for eligible healthcare expenses. Offering an FSA is a win-win for employers and employees, since it:

  • Helps reduce the tax burden for both
  • Minimizes out-of-pocket spending on healthcare items for workers

An HRA account is an employer-funded health plan that reimburses employees for medical expenses that their standard healthcare insurance plan doesn’t cover. Employers fund the plan by making the distributions, which are tax deductions for their business.

What is the history of the Inventory Information Approval System? 

In 2007, the IRS mandated that an IIAS system be in place for the purchase of FSA and HRA-eligible products beginning January 1, 2008 for all retail stores that did not fall under the Merchant Category Codes that define usual drug stores and pharmacies. This impacted larger retailers, including supermarket and warehouse chains, that had to instate an IIAS system by the first of January 2008 or risk losing business to independent drug stores.

The IRS then mandated that typical drug stores and pharmacies that fell under MCC 5912 and similar codes have an IIAS system in place by a year later — January 1, 2009 — if they wanted to continue to accept flexible spending cards and compete with the supermarket and warehouse chains. The POS software providers and the pharmacy community were able to have a one-year grace period and a chance to get a system in place that would meet IRS requirements.

Other terms similar to the Inventory Information Approval System that can assist you 

  • FSA eligible expenses: Employees can use the money in their FSA to pay for many different expenses for themself, their spouse, and their dependents. The IRS decides which expenses are eligible and which are not.
  • Pre-tax benefits: Pre-tax benefits mean that a benefit value is deducted from an employee’s paycheck before they’re taxed by the federal government, which reduces the amount of taxable wages an employee earns and has to pay taxes on.

Summary of the definition of Inventory Information Approval System

The IIAS is an IRS-approved inventory management standard that allows merchants such as grocery and drug stores to automatically identify whether a particular product in their inventory is a FSA- or HRA-eligible expense.

Similar glossary definitions you must know

  • Employee benefits: Employee benefits are perks provided to employees in addition to their regular wages or salary.
  • FSA: A flexible spending account allows eligible employees to set aside pre-tax money via payroll deductions into a tax-free account and use this money to pay for eligible healthcare expenses.

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