Want to show a compassionate side to your employees and community? Adoption benefits provide you with that opportunity. Plus, they’re inexpensive. Generally speaking, this benefit has low utilization, that is, they are a low cost, high impact fringe benefit.
What is an adoption benefits plan?
An adoption benefits plan is an employer-sponsored program that financially assists or reimburses employees for expenses related to the adoption of a child. Any employer can sponsor a qualified adoption assistance program, however, restrictions on eligible participants still apply, making former employees and self-employed individuals (ex. partners and more than 2% shareholder in an S Corporation) ineligible to participate in the plan.
The core of most employer-sponsored adoption benefits is financial assistance. Although the particular amount of coverage extended to employees varies, the goal is to reimburse employees for certain expected adoption-related expenses such as adoption agency fees, foreign adoption fees, legal fees, maternity fees for the birth mother, placement fees, and travel expenses directly related to the adoption. Expenses related to using a surrogate mother or adopting a spouse's child are sometimes covered by employer programs.
Tax credit for qualified adoption expenses.
The Code does have an annually adjusted tax credit for qualified adoption expenses. For 2018, the maximum credit is $13,840—the same as the maximum nontaxable reimbursement by an employer’s qualified adoption assistance program. If an employer has an adoption assistance benefit, employees will be able to choose whether to take the tax credit for a qualified expense or submit that expense to the employer-provided program for reimbursement.
Employees may take full advantage of both the tax credit and the tax exclusion for employer reimbursements, as many adoptions result in expenses that exceed the maximum tax credit and adoption assistance plans can be used to reduce the burden of those additional expenses. Paid or unpaid time off from work following the adoption (i.e. adoption leave) is another benefit option that allows the parent to help the child bond and feel comfortable. Some employers offer a combination of financial assistance and leave.
Meaningful financial benefits.
While employers commonly contribute to their adoption assistance benefit programs, a qualified adoption assistance program can provide meaningful financial benefits without any employer contributions. First, adoption assistance benefits may be offered under a cafeteria plan and paid for entirely with pre-tax salary reductions. The appeal of pre-tax salary reductions to pay for adoption expenses, however, is somewhat diminished by the irrevocable election, “use-or-lose,” and other cafeteria plan requirements.
Second, the unique rules applicable to special-needs adoptions allow employees to obtain a substantial income tax exclusion if their employer has a qualified adoption assistance program, regardless of how much the employer contributes. If the employer has the right documentation in place, an employee who adopts a special-needs child can take the full maximum tax exclusion ($13,840 in 2018), whether the employer offers a maximum reimbursement of $13,840, some lesser amount (ex. $5,000), or no reimbursement at all. By taking advantage of this opportunity, even employers on a budget can help employees lower their federal income taxes when they adopt children with special needs.
Qualified adoption assistance plans must have written plan documents in place and provide notification to employees. They are also subject to nondiscrimination testing.
Interested in setting up this type of plan? PrimePay can help!
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