David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: wading through a post-Wade world.

On June 24, the Supreme Court issued a decision in the case of Dobbs v. Jackson Women's Health Organization, which considered whether the right to an abortion was protected under the constitution. The majority in the issued decision overturned the nearly 50 year old precedent of Roe v. Wade.

And while the case doesn't address tax issues, there's always a tax angle. And the final outcome does have implications for both federal and state taxes.

This week, we're looking at some of the federal tax complications.

So, joining me now to talk more about this is Tax Notes reporter Caitlin Mullaney.

Caitlin, welcome back to the podcast.

Caitlin Mullaney: Hi, David. Thank you so much for having me again.

David D. Stewart: So to start off, how about if you give us some background on the Dobbs decision?

Caitlin Mullaney: Well, when the Dobbs decision came down, tax changes were probably not at the top of anyone's mind. But it truly does open a lot of questions with the tax treatment of employer provided travel benefits for abortion care, that will now require employees to cross state lines.

After the decision came down, a lot of companies vowed to provide abortion care access and assistance to employees. But with new employee benefits always comes the question of, who fits the tax bill?

David D. Stewart: Now, I understand you recently spoke with someone about these tax complications. Can you tell us about your guest and what you talked about?

Caitlin Mullaney: Yes. I recently spoke with Caroline Rule. She's a partner in the New York office of Kostelanetz & Fink. She spoke with me about the tax treatment of a variety of the options that employers have to offer for travel benefits for abortion care post-Dobbs, and some of what we may expect to see in the future.

David D. Stewart: All right, let's go to the interview.

Caitlin Mullaney: First of all, Caroline, thank you so much for being with us today, and welcome to the podcast.

Caroline Rule: Hi, I'm really happy to be here.

I just want to preface what I'm going to say today by explaining that I'm not an expert in healthcare law. So I'm not an expert in the Employee Retirement Income Security Act, usually known as ERISA. The Affordable Care Act, ACA. The Health Insurance Portability and Accountability Act, HIPAA, with which privacy is the primary consideration. Nor the Consolidation Omnibus Budget Reconciliation Act, COBRA. Which most people know provides for continuing coverage after an employee leaves.

I am concerned specifically about when an employer can provide tax-free abortion benefits to its employees. But the tax issues in this area are inevitably intertwined with all these healthcare statutes. So an employment law attorney will be a necessary part of a team determining the fine details of how to deal with abortion travel after Dobbs.

Caitlin Mullaney: Thank you so much for prefacing that, Caroline. So we're going to go ahead and get right into it.

My first question is about all the employers that have promised to cover abortion travel for their employees post-Dobbs. What option do these employers have to provide these travel benefits to the employees without the benefits being taxed?

Caroline Rule: Well, there are a great number of possible ways an employer can deal with it. The problem is that employers are going to be operating across state lines, and facing a checker-board of inconsistent and quickly evolving laws.

So employers can offer an abortion-related benefit that covers the cost of the medical care for the abortion in addition to travel, to obtain the abortion. With respect to the cost of medical care, businesses can deduct the cost of employee health coverage. And they have been able to for a long time.

Internal Revenue Code [section] 213(d) describes deductible medical care as, "Care for the diagnosis, cure, mitigation, treatment or prevention of disease," and then, "Or for the purpose of affecting any structure or function of the body." Since the 1973 revenue ruling, and in the IRS' current Publication 502, which is entitled "Medical and Dental Expenses," abortion is recognized as medical care under the second phrase of section 213(d).

As a result, an employer's group health plan can provide a benefit for medical abortion costs on a tax free basis. So long, obviously, as the abortion is not illegal in the state where it is provided. A Treasury regulation specifically provides that medical care does not include expenses for illegal treatment.

Providing abortion benefits under an employee's group health plan is the most straightforward path to providing abortion-related benefits. Since a group plan is already compliant with federal and all state statutes, and is already in place, and this path is most unlikely to involve HIPAA issues for employers.

Presently, most group health plans either don't cover travel expenses, or limit those expenses to travel to centers of excellence. That is, centers that provide high cost procedures like transplants. So offering an abortion travel costs will likely need an amendment to a group health plan.

And among other issues, employers must consider whether limiting travel to abortion could create a disparate treatment risk, i.e. only females. And also whether they want to limit travel to the closest state where an individual can obtain a legal abortion.

Outside of group health insurance plans there are a number of different arrangements, none of them perfect, which an employer can use for tax advantage reimbursement to employees. The first is a Health Reimbursement Arrangement, or HRA. This is a tax advantage arrangement that reimburses employees for qualified healthcare costs. It must be entirely employer funded, must be carefully designed to comply with their ACA, ERISA, HIPPA and COBRA, and related regulations. But it would cover medical expenses as defined under IRC [section] 213(d). This kind of arrangement is limited to participants in the employers group health plan, but it is not subject to contribution or benefit limits.

Then there's a variation and Excepted Benefit Health Reimbursement Arrangement, or EBHRA. This was first created in 2019, and it's a tax advantage benefit that must be offered to all employees. Although a participant is not required to be a part of the group health coverage, but there is a funding cap each year with cost of living increases. The funding cap is $1,800 this year, and $1,950 next year.

But an EBHRA must not provide significant medical care, is not integrated with another group health plan, and an employee does not need to contribute to it to participate. There's no guidance yet about what constitutes significant healthcare. So we don't know whether that will apply to abortion-related travel, or abortion costs. This probably will. If costs are unsubstantiated by an employee, the cost will be income to the employee.

Another option is a flexible spending account. This is a tax advantage account that can be used to pay for unreimbursed section 213(d) expenses. But if the employee does not contribute, an employer contribution is limited to $500. But this plan can be offered to employees who don't participate in group health plan.

And then a variation is an Excepted Benefit Healthcare Flexible Spending Account, which is quite a mouthful, EBFSA. Under this, an employee contributes pre-tax compensation to be used for medical expenses. Employers may also contribute. Contributions are limited currently $2,800 per year. Also, payments from an EBFSA cannot be more than the greater of twice the employee's contribution. Or, the employee's contribution, plus $500.

Finally, there's an employee assistant program. This has to be separate from any group health care plan, and participants cannot be charged a premium or cost to participate. Again, this cannot provide significant benefits in the nature of medical care, about which we have no guidance currently. If it does provide medical coverage, a medical travel benefit might tip it over into being determined to provide significant medical care benefits. And therefore subject it to all kinds of regulatory requirements, including under the ACA.

So those are the main ways in which an employer can offer to reimburse abortion-related costs, and abortion-related travel costs.

Caitlin Mullaney: In your article, you mentioned another fee cap. And that's the $50 a day IRS limit on out of state lodging during medical travel. Specifically that anything above this must be included as taxable income. Which is crazy that in 2022, $50 a day is still the limit.

Do you see any way that employers can get around the tax bill for the excess falling to the employees?

Caroline Rule: No, unfortunately not. Remember this is only for lodging. It's not for reasonable travel expenses, which would include plane travel, mileage rate for car travel, etc. Nor the abortion proceeding itself. It is only for lodging in connection with travel, primarily for an essential to an individual's medical care. But the $50 limit does seem absurd.

And these amounts have not been updated since at least the 1980s, or even before. Greater amounts can be paid, but they will constitute income to the employee which is subject to withholding taxes.

The wording of this provision is ridiculous. It says, "Amounts paid for lodging," and then says, "not lavish or extravagant under the circumstances will be covered." Now, I don't know where you can stay for $50 a night that is lavish or extravagant. But anyway, that is the limit. There's no way around it.

Another $50 may be paid for a medical necessary travel companion, such as a parent of a minor child. And meals only reimbursed if they have been obtained in the hospital.

Caitlin Mullaney: Wow. It's crazy that those have not been updated in almost 40 years at this point.

Caroline Rule: Yes, I agree, but there doesn't seem to be any movement on that at the moment.

Caitlin Mullaney: And when it comes to the abortion-related travel benefits, are there different considerations for employers who provide a fully insured group health plan, versus employers who provide a self-funded health plan?

Caroline Rule: Absolutely, definitely. Industry giants like Amazon, Disney, Netflix, Microsoft, and others have promised abortion-related benefits. And these huge organizations usually have self-funded plans, which are essentially their own insurance plan. And under these plans they can determine for themselves what their plans will cover.

These large business entities group health plans are regulated by ERISA, which generally preempts state insurance laws and regulations. So these can provide an abortion benefit without really any limit other than that the abortion must be legal in the state where it's provided.

Fully insurance plans are plans purchased by an employer directly from an insurance company. And these are regulated by the states, and are subject to individual states insurance laws. This is because ERISA preemption has a savings clause whereby a fully funded insured plan is not actually considered insurance. And so to allow state insurance laws to cover those fully funded plans.

A few states require fully insured plans to cover abortion. Those are California, New York, Illinois, Maine, Oregon, and Washington. While other states prohibit abortions within their state boundaries. So essentially, fully insured plans are at the mercy of what their carriers will cover.

And as I said before, tax exempt covered abortion services must be legal where provided. If the employer's group health plan, and this would be a fully funded one, is offered by a health insurance company licensed only in a state where abortion is illegal, the employer can't offer abortion-related expenses under its plan. But it can consider some of the other options I already described.

In addition to the travel reimbursement benefit, an employer may just expand an existing personal time off, or vacation policy. Or even a separate paid time off specifically for traveling out of state for medical care. But this must not be discriminatory. Usually meaning it must be offered to all employees and regardless of gender. So it wouldn't be specific to abortion. And employers should limit the information they require from an employee to support the use of this paid time off in order to avoid HIPAA problems.

Obviously, providing this kind of benefit is going to be a significant new expense for an employer. So they would have to decide whether it's worth it for their employees satisfaction, and whether they can afford it.

Caitlin Mullaney: And kind of going off of what you just said, that with states like Texas already imposing civil penalties for aiding individuals in receiving abortion care, what would you think is the best option for companies to provide these tax exempt benefits for interstate travel without fearing the consequences of these new state penalties?

Caroline Rule: States could bar companies from operating in a state if they cover abortion costs. And some laws might allow shareholders to sue for breach of fiduciary duty, or even impose criminal liability on a corporation's executives. But these kinds of civil and/or criminal penalties, I believe, are likely to be held preempted by federal laws.

If you remember Judge [Brett] Kavanaugh's concurrence in the Dobbs case, he stated, admittedly without any support, that there is a right of interstate travel. He could have cited a 1975 Supreme Court opinion in Bigelow v. Commonwealth of Virginia, which held that Virginia could not prevent its residents traveling to New York to obtain an abortion.

But this is an untested area of law, and cases will take years to resolve. So there's really, employers are a bit between a rock and hard place.

ERISA itself doesn't preempt state criminal laws of general applicability. And that's the term of art. But it's unclear what laws will be generally applicable, or whether the kind of laws we're talking about would be held to be targeted at employee benefit plans concerning abortion, and would so be preempted.

So the best option I think for these entities is to just closely monitor what states are doing, what the federal government is doing in response, and just stay on top of it all to decide where they can go from here.

Caitlin Mullaney: And the Dobbs decision, at this point, is just over two months old, but the effects of the decision were immediate to so many individuals and businesses. As you mentioned in your article, there are tax healthcare and employment attorneys already monitoring the ripple effects of the decision. Have you seen any questions arising out of it thus far in practice?

Caroline Rule: Other than the many I've already talked about, not specifically. The Biden administration has taken an expressed position that Americans must remain free to travel to another state to seek the care they need. And the DOJ, Department of Justice, has currently committed itself to defending that right.

In addition, Biden issued an executive order directing the Department of Health and Human Services to expand access to medical abortion pills. That's a particularly thorny issue because after COVID, the Department of Health has allowed telehealth appointments for people seeking medical abortion pills. And then there are questions about if you have a telehealth visit with a provider in another state, who then mails the medications into a state where abortion is illegal? What are the implications of that? So that's something that's going to evolve over time.

And the Department of Health also issued guidance reminding that abortion remains legal in many states. And also that birth control is still covered under the ACA with no out of pocket costs. You would think that would be obvious, but I was amazed that in [Justice] Clarence Thomas's concurrence he suggested that the court may revisit Griswold v. Connecticut. Which is a 1965 Supreme Court decision, holding that the constitution protects the liberty of married couples to buy and use contraceptives.

How, in this day and age that could be revisited, I just have no idea. But then I never expected that Roe v. Wade could be overturned.

There also, there've been attempts to bring legislation, federal legislation, banning payment for interstate travel. [Sen.] Marco Rubio (R-Fla.) introduced a bill to that effect recently. It's not going to happen under this administration, but with the new Congress coming up we really don't know what is going to happen.

Caitlin Mullaney: That was actually my last question. If you saw in a post-Dobbs world, if you could see a time with the Supreme Court decision is matched with the federal ban on providing tax-exempt benefits for abortion travel?

Caroline Rule: It's hard for us, or me, to picture that right now, but yes, it is a possibility. Certainly a possibility if we changed to a different administration. And then that will bring up a whole new set of questions about whether, if any, travel can be covered.

Caitlin Mullaney: Well, sadly that's all the time we have for today. And I want to refer any interested people to this article. It's titled, "Tax Implications of Dobbs for Interstate Travel Expenses to Obtain Abortions." And Ms. Rule, thank you so much for taking the time to talk to us today.

Caroline Rule: Thank you very much for having me.

David D. Stewart: And now, coming attractions. Each week we highlight new and interesting commentary in our magazines. Joining me now is Acquisitions and Engagement Editor in Chief Paige Jones. Paige, what will you have for us?

Paige Jones: Thanks Dave. In Tax Notes Federal, four Morgan, Lewis and Bockius practitioners explore how the definition of digital asset brokers was brokered. Jason Chen explores the reporting and disclosure rules for legal tax shelters, and the penalties that may apply if those rules are not followed. In Tax Notes State, Robert Plattner reviews a New York bill, which would require polluting companies to pay the state $30 billion over 10 years. This would cover a portion of the state's anticipated costs for adapting to climate change. Robert Tannenwald examines the impact of the proposed millionaire's tax in Massachusetts. In Tax Notes International, Rebecca Christie considers whether a changing global tax framework means its time for a robot tax. Robert van Brederode considers five key questions surrounding the feasibility and the desirability of implementing a wealth tax in the United States. In Featured Analysis, Roxanne Bland discusses inventory taxes at the state and local level with Tax Analyst Chief Economist Marty Sullivan. And finally, on the Opinions page, Nana Ama Sarfo takes a look at the green energy tax credits in the new Inflation Reduction Act.

David D. Stewart: That's it for this week. You can follow me online @TaxStew, that's S-T-E-W. And be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.