**Question:  **What are some common infertility related expenses that an employer’s infertility HRA could cover?

**Compliance Team Response: **Infertility HRAs are an increasingly common employer-sponsored benefit to provide employees with a tax-advantaged vehicle to cover all or a portion of their infertility expenses that are not covered by the major medical plan.

_For more details about how to design an infertility HRA to comply with ERISA, the ACA, and other applicable employee benefits laws, see our previous post: _Setting Up an Infertility HRA.

General Rule: HRAs Can Reimburse Medical Expenses Only

An HRA can reimburse only IRC §213(d) medical expenses.  The best general IRS overview of what constitutes a medical expense is IRS Publication 502.

Infertility HRAs: Determining What Qualifies as a Medical Expense

Although IRS Publication 502 is the most useful overview source generally for what qualifies as a medical expense, it is limited in its usefulness with respect to common infertility expenses.  Most of the tax guidance addressing infertility expenses stems from IRS Information Letters, Private Letter Rulings, and court cases.

Common Infertility HRA Expenses

Available IRS guidance suggests that common §213(d) infertility medical expenses for employees or spouses with a medical infertility diagnosis include:

• In-vitro fertilization (IVF)

• Temporary sperm/egg freezing (informal IRS guidance suggests the cryopreservation duration must be limited to one year)

• Egg or sperm donor expenses for the employee or spouse to conceive

• Intrauterine insemination (IUI)

• Gamete intrafallopian transfer (GIFT)

• Zygote intrafallopian transfer (ZIFT)

• Pre-implantation genetic testing (PGT)

• Embryo transfer

• Hysterosalpingogram

• Hysteroscopy

• Intracytoplasmic sperm injection (ICSI)

• Laparoscopy

• Ovarian stimulation

• Semen analysis

• Testicular sperm aspiration/extraction

• Transvaginal ultrasound

• Operations to reverse a prior surgery that prevented the employee or spouse from having children

**Important Note: **HRAs are not required to cover all qualifying medical expenses.  Just because an HRA is permitted to reimburse these common infertility medical expenses does not mean every employer’s infertility HRA will cover them.  Employers have full discretion in the plan design of the HRA—including the determination of which qualifying expenses will be eligible for reimbursement.  Consult the infertility HRA plan materials to determine which expenses are covered.

Common Expenses that are NOT HRA-Eligible Expenses

Available IRS guidance suggest that common fertility-related expenses that are not §213(d) medical expenses include:

• Surrogacy

• Non-temporary sperm/egg freezing (generally cryopreservation beyond one year)

• Egg or sperm donor expenses where neither the donor nor the carrier is the employee or spouse

• Same-sex couples with IUI, IVF, or similar expenses but no medical diagnosis of infertility

**Important Note: **Many employers still provide reimbursement for these types of expenses on a taxable basis through a broadly defined infertility program that includes coverage for non-medical expenses outside the HRA.  Therefore, although these expenses cannot be reimbursed tax-free by an infertility HRA, the employer may still cover all or a portion of these costs through a broadly defined infertility program.  Consult the program materials to determine which non-medical expenses are covered on a taxable basis.

Adoption: Separate Tax Code Section 137

Adoption expenses cannot be part of an HRA because they are not medical expenses.  HRAs can exclusively reimburse §213(d) medical expenses.

However, there is a separate section of the tax code (IRC §137) that permits employers to offer up to $14,080 in tax-free adoption assistance in 2019.  That amount is adjusted annually for inflation.

A few more details:

• We generally recommend against structuring the adoption benefit as an employee pre-tax contribution structure.  The use-it-or-lose-it rule, irrevocable election requirements, and the lack of a FICA tax exemption will in most cases make this an undesirable benefit for employees to contribute to through a cafeteria plan.  Very few employers offer employee-funded adoption assistance for these reasons.  Almost all adoption reimbursement programs are funded solely by the employer outside of a cafeteria plan.

• The IRS limit for employer-provided adoption assistance is $14,080 in 2019 (this amount is indexed for inflation). Because this is a relatively high limit, many employers set their program’s adoption assistance limit at some lower amount (e.g., $10,000).

• Adoption assistance programs are not subject to ERISA, but they still require a plan document to comply with §137.

• The tax rules differ for how to handle expenses of adoption proceedings that have not been finalized depending on whether it is a foreign, domestic, or special needs adoption.  Many employers design their adoption assistance program to permit reimbursement of expenses only for finalized adoptions to avoid additional complication in this area.

• There is no income withholding taken from adoption assistance amounts.

• Adoption assistance amounts are subject to payroll taxes.

• On the Form W-2, the adoption assistance amounts will show in Boxes 3 and 5 (but not Box 1).  It will also show in Box 12 using Code “T”.

• Employers should direct employees to consult the IRS Instructions for Form 8339, the IRS Interactive Tax Assistant for Adoption Expenses, and with their personal tax advisor for more information related to the tax-advantaged status of adoption assistance in specific situations.

Regulations

IRS Notice 2002-45:

https://www.irs.gov/pub/irs-drop/n-02-45.pdf

To qualify for the exclusions under §§ 106 and 105, an HRA may only provide benefits that reimburse expenses for medical care as defined in § 213(d).

IRS Publication 502:

https://www.irs.gov/pub/irs-pdf/p502.pdf

You can include in medical expenses the cost of the following procedures performed on yourself, your spouse, or your dependent to overcome an inability to have children.

• Procedures such as in vitro fertilization (including temporary storage of eggs or sperm).

• Surgery, including an operation to reverse prior surgery that prevented the person operated on from having children.

IRS Private Letter Ruling 200318017:

https://www.irs.gov/pub/irs-wd/0318017.pdf

HOLDING:

The unreimbursed expenses for the egg donor fee, the agency fee, the donor’s medical and psychological testing, the insurance for post-procedure donor assistance, and the legal fees for preparation of the contract, are medical care expenses that are deductible under § 213.

IRS Information Letter 2005-0102:

https://www.irs.gov/pub/irs-wd/05-0102.pdf

Fertility is a function of the body, and treatment to overcome infertility is within the definition of medical care above. Obtaining an egg or embryo to be inserted into the taxpayer’s body is medical care of the taxpayer.

Morrissey v. United States, 119 AFTR 2d 2017-401 (M.D. Fla. 2016)

Section 213 does not permit any taxpayer, regardless of sex, sexual orientation, or gender to deduct the kinds of IVF expenditures Plaintiff claims here. The parties have stipulated that the IRS has interpreted § 213 to deny taxpayers deductions for the kinds of costs associated with surrogacy, without respect to a taxpayer’s sexual orientation. As Defendant correctly points out, a single, heterosexual female who was medically infertile and incapable of carrying a child to term, or who simply chose to have children in the same way as Plaintiff — albeit with the additional need for a third-party sperm donor — would not be able to deduct IVF expenses she paid for treatment of a donor and/or gestational surrogate who was neither her spouse, or her dependent. Likewise, a heterosexual couple in which the wife was medically infertile and medically incapable of carrying a child to term, or who chose not to carry the child herself, who used a similar method as Plaintiff, would not be entitled to deduct the expenses of contracting with and having the necessary procedures for a third-party gestational carrier, or any egg donor if the donated egg is not implanted in the taxpayer, spouse, or dependent. The same result would hold for a lesbian couple in which neither partner could, or wanted to, carry a child to term and who utilized a third-party surrogate to carry their child.

IRS information Letter 2002-0291:

https://www.irs.gov/pub/irs-wd/02-0291.pdf

A surrogate mother is, of course, neither the taxpayer nor the taxpayer’s spouse, and typically is not a dependent of the taxpayers. Nor is an unborn child a dependent. Cassman v. United States, 31 Fed. Cl. 121 (1994). Thus, medical expenses paid for a surrogate mother and her unborn child would not qualify for deduction under § 213(a).

IRS Information Letter 2004-0187:

https://www.irs.gov/pub/irs-wd/04-0187.pdf

A surrogate mother is not the taxpayer or the taxpayer’s spouse, and typically is not the type of relative listed in § 152(a). The surrogate mother usually is neither a member of the taxpayer’s household for the entire taxable year, nor receives over half her support from the taxpayer for that year, and thus does not qualify as a non-relative dependent. Nor is an unborn child a dependent. Cassman v. United States, 31 Fed. Cl. 121 (1994). Thus, medical expenses paid for a surrogate mother and her unborn child generally would not qualify for deduction under ‘ 213(a).

IRS Form W-2 Instructions:

https://www.irs.gov/pub/irs-pdf/iw2w3.pdf

Special Reporting Situations for Form W-2

Adoption benefits.

Amounts paid or expenses incurred by an employer for qualified adoption expenses under an adoption assistance program are not subject to federal income tax withholding and are not reportable in box 1. However, these amounts (including adoption benefits paid from a section 125 (cafeteria) plan, but not including adoption benefits forfeited from a cafeteria plan) are subject to social security, Medicare, and railroad retirement taxes and must be reported in boxes 3 and 5. (Use box 14 if railroad retirement taxes apply.) Also, the total amount must be reported in box 12 with code T.

California Taxability of Employee Benefits:

https://www.edd.ca.gov/pdf_pub_ctr/de231eb.pdf