I am planning to freeze egg for possible future use (getting old
) I know insurance doesn't cover those, but can I use HSA money for testing, egg retrieval procedure etc (all the way from beginning to the end of egg retrieval, not including egg storage)?
I am of the view that those expenses would be eligible medical expenses for the HSA. But there is some risk here that the IRS and courts would reject that as an eligible medical expense. This is one of those instances in which where you live may make a difference. First, it is important to understand that the same definition for medical expenses for the medical expense deduction is used for what are eligible medical expenses for the HSA. That definition is:
(1) The term “medical care” means amounts paid--
(A) for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body,....
Internal Revenue Code § 213(d)(1)(A). Here, note that the definition, which is certainly not drafted as clearly as I would like, nevertheless has two parts. It is an eligible expense if it is an amount paid for (1) the diagnosis, cure, mitigation, treatment, or prevention of disease OR (2) or the purpose of affecting any structure or function of the body. A number of taxpayers years ago seized on (2) to justify expenses for purely cosmetic surgery and that was considered enough of a problem that Congress amended IRC § 213 by adding paragraph (d)(9) to explicitly exclude costs of cosmetic procedures from the definition of medical expenses. Yours is, however, not a cosmetic procedure. It is also, however, not for the diagnosis, cure, mitigation, treatment, or prevention of disease. But I believe it does count as an expense for the purpose of affecting any structure or function of the body. It is under that part of the definition that, for example, birth control expenses and expenses for procedures like vasectomies are eligible medical expenses.
The problem is that the case law on in vitro fertilization (IVF) expenses is pretty sparse. However, the position of the IRS and the Tax Court appears to be that unless the procedure is necessary to overcome an infertility problem the expenses are not deductible. The IRS relies on a part of the Treasury Regulations for this which states: "Deductions for expenditures for medical care allowable under section 213 will be confined strictly to expenses incurred primarily for the prevention or alleviation of a physical or mental defect or illness." Treas. Reg. § 1.213-1(e)(1)(ii). Thus, the IRS and Treasury when coming up with that regulation did not fully appreciate that the definition contains two parts. Rather, they take the view that there must always be a connection to a cost for diagnosis, cure, mitigation, treatment, or prevention of disease. That view, though, does not square with decisions that allow expenses for things like birth control or vasectomies. The regulation is old and in my view was too narrow when it was issued and doesn't stand up well today.
However, despite that the IRS seems to have prevailed in getting the Tax Court to buy that argument to deny deductions for IVF expenses that were not to overcome infertility.
But the good news is that the only reported appellate case decision on the matter does get it right. In that case, the taxpayer, Mr. Morrissey, was a gay man married to his gay partner. The two men were not infertile. But obviously they could not have children of their own. They wanted a child and pursued IVF to do it, using Mr. Morrissey's sperm and then using the egg of a donor and having yet another women be the surrogate host for the child. The total expenses were huge, over $55,000. He claimed a medical expense deduction on his return for that of $36,538. Note that because of a limit to the medical expense deduction he could not have deducted all $55,000+ he spent. That limitation becomes significant later. It is important also to note that just about $1,500 of the expenses were for the treatment done to Mr. Morrissey, i.e. collection of his sperm, blood tests on him, etc. The bulk the expenses he had were for the donated egg and the surrogate.
He still lost the deduction he claimed. His expenses were not for overcoming any medical problem, like infertility. And the expenses for the egg donor and surrogate were not for the purpose of affecting his body; they affected the bodies of the donor and surrogate (who might have been able to take deductions for their costs). But the court noted that the expenses related to collecting his sperm, the blood tests on him, etc, would be deductible expenses. The problem there was that $1,500 was too small an expense to overcome the limitation on deducting medical expenses. Specifically, the court said:
To be sure, the aspects of the IVF process that related specifically to Mr. Morrissey’s provision of healthy sperm could be said to have affected his reproductive function. So, for instance, if the $1,500 that Mr. Morrissey spent on sperm collection and accompanying bloodwork had exceeded the applicable 7.5%-of-AGI threshold, it would have been deductible. But as already explained, it didn't—by a long shot—and so it wasn't.
Morrissey v. United States, 871 F.3d 1260, 1267 (11th Cir. 2017). The opinion is a well reasoned and well written explanation of how IRC § 213 works. Your expenses for extracting the eggs, tests related to that, etc., are analogous to the expenses Mr. Morrissey had for sperm collection and related tests. So under the reasoning of the 11th Circuit Court of Appeals, your expenses would be deductible.
The thing is, the Circuit Courts of Appeal are not national courts. They each cover specific states. The 11th Circuit covers the states of Alabama, Georgia, and Florida. If you live in one of those states, then you have a very good position to take that the expenses are deductible as the federal courts within those states must apply the Morrissey decision when deciding similar issues. And the Tax Court, through its Golsen rule, would apply the Morrissey decision if the taxpayer was in one of those states.
The Morrissey case is pretty new, released just two years ago in September 2017. It is thus too early yet to see how it will affect what the IRS and Tax Court would say in future cases like yours. And it is also not clear how other circuits would rule on the issue. The First Circuit (which covers Maine, Massachusetts, New Hampshire, Puerto Rico and Rhode Island) upheld a Tax Court decision denying IVF expenses, stating that:
As the court concluded, the various expenses incurred by petitioner were not for the treatment of any underlying medical condition suffered by the taxpayer; as noted, he stipulated that he was not infertile and that his previous children had been produced by natural processes in conjunction with the woman who was his wife at the time. In addition, the procedures were not for the purpose of affecting any structure or function of taxpayer's own body. Rather, they affected the bodies of the gestational carriers who, petitioner agrees, were not his dependents. Consequently, the tax court properly affirmed the Commissioner's disallowance of the deductions. The decision of the tax court is summarily affirmed.
Magdalin v. Commissoner, No. 09-1153, 2009 WL 5557509, at *1 (1st Cir. Dec. 17, 2009). But the case was a summary decision and not published, so it has no precedential value. No other court has to follow it. But it does hint that the court might make the same distinction that the 11th Circuit did. It's not real clear on that, though. The other circuits have not spoken on this issue. However, the Morrissey decision would be something those other circuits would consider in making their own decisions on the matter.
So if you are outside Georgia, Alabama, and Florida there is a risk you might lose on the issue. I would feel confident advising a client in my state (which not one of those three) to claim that the expenses you would have are eligible medical expenses for the HSA, but I would also note the risk to the client. I am not your lawyer and I am not giving you legal advice. The above is simply an explanation of the current state of things. You may want to see a tax attorney in your state to get a written opinion backing up using the HSA for these expenses, if there is an attorney willing to provide it. That can help insulate you against penalties should the IRS reject your position. (In which case you'd simply have the income to include but at least not the penalties.) Providing the lawyer what I provided above might save you some research expense fees if you decide to seek that opinion.
