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IRS Private Letter Ruling Helps Clarify Permissible Tax Deductions for Medical Costs

A recent IRS private letter ruling shed more light on what medical expenses are tax deductible under Code Section 213. The letter was submitted by a male same sex married couple seeking permission to deduct costs and fees associated with in vitro fertilization (IVF) and gestational surrogacy.

 

What is a private letter ruling?

A private letter ruling is an IRS issued response that interprets tax laws to a specific set of facts submitted by a taxpayer. Although private letter rulings do not have the force of law on other taxpayers, plan sponsors, advisors and participants often look to private letter rulings as informal guidance when they make decisions on plan administration or personal taxes.

Background

The facts of this private letter ruling involved a male same sex married couple that wished to have a child. One spouse would donate sperm and the sister of the other spouse would donate the egg, while an unrelated third party would be used as a gestational surrogate. They wanted the IRS to approve deductions for:

  • Medical expenses directly attributed to both spouses
  • Egg retrieval
  • Medical expenses of sperm donation
  • Sperm freezing
  • IVF medical costs
  • Childbirth expenses for the surrogate
  • Surrogate medical insurance related to the pregnancy
  • Legal and agency fees for the surrogacy
  • Any other medical expense arising from the surrogacy

What did the IRS decide?

The IRS noted that Section 213 allows tax deductions for medical costs that include “diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body”. They also cited precedent that this definition has been narrowly applied. Therefore, only costs and fees directly attributable to the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body of the taxpayer, their spouse, or their dependent qualifies for a Section 213 medical deduction. The expenses involving egg donation, IVF, and gestational surrogacy were not permitted because they were expenses incurred for a third party.

Considerations for Plan Sponsors and Participants

Because many people use health FSAs and HRAs to reimburse themselves for medical expenses, issues like those raised in the private letter can cause challenges for sponsors of health FSAs and HRAs. Plan sponsors and administrators should work with their TPAs to ensure that approved distributions meet the approved reasons found in IRS Publication 502. Sponsors should also be mindful of this private letter ruling that instructs that expenses should be approved only if they are for costs that are directly attributable to the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body of the taxpayer, their spouse, or their dependent.

Stay up to date on the latest developments impacting health care and the impact on employer benefits plans. Visit OneDigital’s Compliance Confidence blog for recent news.

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