From the Pride Agenda's Program Director Desma Holcomb:
One of the big problems facing transgender people is that society, including the insurance industry, is divided over whether sex-change surgery is "medically necessary" or "cosmetic." One of the spheres where this debate is being played out is the IRS, which had been alleging in a court case that sex-change surgery expenses are not tax deductible because there are "cosmetic" rather than "medically necessary." For example, right now employees cannot use their pre-tax medical account benefit for sex-change surgery expenses, due to this position by the IRS.
This NY Times brief describes an important federal Tax Court decision that supports the transgender plaintiff's assertion that the surgery was medically necessary and overrides the IRS's assertion that it was not.
In addition to its impact on pre-tax medical accounts, this IRS assertion has, up until this Court decision, acted as a rationale for some insurance companies and some self-insuring large corporations to exclude (rather than include) this surgery as a legitimate, covered medical expense.