Healthcare services and tax regulations seem to always find one another in a perpetual dance. As new services and coverages gain greater market demand, regulations and tax law try to catch up to shifting social needs. For many years, mental health found itself in this vortex, then same-sex domestic partner benefits – and now it’s surrogacy expenses.
Viewpoints from Adam Okun
It is a well-established tax principle that expenses deemed as medical care under the Internal Revenue Code (Section 213) are not included in the employee’s gross wages and therefore not subject to taxation if an employer plan elects to cover those medical services. And while standard infertility services performed on the employee or eligible dependent (e.g. intrauterine insemination [IUI] and in-vitro fertilization [IVF]) are deemed deductible because they affect the body of the plan member, surrogacy services are far more challenging – particularly as they relate to LGBTQ couples or a single person – where the egg donation, freezing, implantation and baby delivery are related to a third party.
While an employer plan can elect to extend a host of surrogacy services under its group medical program, it would need to remain cognizant of the cost of these services and ensure the plan is appropriately recognizing those services as taxable components of the program, and that they could give rise to taxable income for the employee. It’s also worth noting that some states have passed laws that expressly prohibit surrogate contract arrangements – including New York – and as such, employers must be careful not to inadvertently transgress any applicable laws by allowing for surrogate coverage or reimbursements.