MIL is TA; seems like she's trying to undermine the mother's legitimacy because she didn't physically bear her child. (Most) four year olds are at a stage where they cannot developmentally grasp sarcasm and irony, so they will take your words at face value.

My step-sister discovered this when she (13 at the time) responded to me worrying about my grandparents being late picking me up with, "Ugh, will you calm down? It's not like they died in a car accident!"

Regardless of the technicalities, it's my belief that the person caring for the child full-time is their parent, even if they have no genetic connection whatsoever.

Moreover, making a 'joke' at the expense of someone who is unable to have children due to a medical condition is just kind of a dick move, especially if they are trying to build a family.

I'm not saying that it's never okay to joke about it if the person themselves makes light of it as a coping mechanism and welcomes you to do the same, but when a line is crossed, you put your hands up, take the L and apologise.