Adoption assistance program

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Under Code Section 137, employers may offer adoption benefits that qualify for special tax benefits.


Benefit Limits

Up to $10,000 may be excluded from an employee's income for amounts paid or services provided by an employer to allow the employee to adopt a child. The limit is cumulative for all taxable years for each child; in others, the exclusion is capped at $10,000 regardless of how the expenses are spread out through tax years.

If an employee adopts a "special needs" child, the employee qualifies for a $10,000 decrease in gross income, regardless of the actual expense of adoption.

The above benefits are subject to income testing. The exclusion begins to phase out at $150,000 of gross income, and is eliminated at $190,000.

The above dollar amounts are adjusted annually for inflation.

Qualified Expenses

Only qualified expenses may be excluded from income. These expenses include adoption fees, legal costs, and travel.

Plan Requirements

An adoption assistance program must be a separate written plan of an employer for the exclusive benefit of such employer’s employees:

  1. under which the employer provides such employees with adoption assistance;
  2. which benefits employees who qualify under a classification that does not discriminate in favor of highly compensated employees or their dependents;
  3. which does not distribute more than 5 percent of its benefits to principal shareholders or owners that own more than 5 percent of the employer; and
  4. which provides reasonable notication to employees of its availability and terms.

An adoption assistance program may be unfunded.

Application of ERISA

ERISA does not apply to adoption assistance programs.

Guidance

Notice 2002-24 (suspends Form 5500 reporting requirement)