What is the tax status of employer-provided surrogacy/gestational carrier benefits, and can they be provided through an employer’s group health plan?
Generally, employer-provided surrogacy/gestational carrier benefits are taxable to the employee. They are not typically provided through the employer’s group health plan but rather through a written policy outside of the group health plan. Certain state laws may limit or prohibit surrogacy/gestation carrier contracts.
Most employer-provided benefits paying the expenses for a surrogate/gestational carrier are taxable to the employee. Taxation is based on whether the benefits meet the Internal Revenue Code definition of “medical care,” which includes amounts paid ‘‘for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body [for the taxpayer, taxpayer’s spouse, or a taxpayer’s dependent.]” Services considered medical care can be excluded from an employee’s gross income.
Most employer-provided surrogacy/gestational carrier expenses are not considered “medical care” because providing services to the surrogate or carrier is not the same as providing those services to the taxpayer (i.e., the employee or his or her spouse or dependents) as the tax code requires.
Several IRS private letter rulings (PLRs) specifically address the tax status of surrogacy expenses. While PLRs are not formal regulations, they do provide insight into how these benefits are taxed:
The following court cases also state that certain medical expenses for a surrogate/gestational carrier are not tax-deductible and can’t be excluded from income if paid by an employer:
Employers may cover medical care for surrogate/gestational carriers under their group health plans, but it is not a common practice. Plans typically only cover employees and their tax dependents because those are the individuals who may receive tax-favored benefits. Given that surrogacy/gestational carrier benefits are taxable, most employers provide them outside of their group health plans. Keep in mind that under ERISA, benefits under a group health plan are intended to be for employees and their beneficiaries; therefore, covering non-employees under an ERISA governed group health plan could raise ERISA compliance issues (including potential issues for multiple employer welfare arrangements).
Aside from the tax status of employer-provided surrogacy/gestational carrier benefits, state laws may limit, prohibit or highly regulate the surrogacy/gestational carrier process. This could include limiting compensation in surrogacy contracts, limiting surrogacy to married couples or prohibiting surrogacy contracts entirely. Employers interested in adding surrogacy/gestational carrier benefits should consult their legal counsel.