Are Employer-Provided Adoption Benefits Taxable?

(Last Updated On: February 7, 2020)

Many employers provide limited benefits for their employees as adoption assistance. Are employer-provided adoption benefits taxable? Adoption-Assistance Benefit pays and reimburses staff for providing support to staff, including the costs associated with adopting a child.

Tax laws generally identify creative benefits subject to employee retention tax, and the value of the required benefit should be included as part of an employee’s wage.

Internal Revenue Services benefits exclusionary rules allow taxpayers to exclude certain fringe benefits from costs, and eligible adoption-assistance benefits are included in this section.

Excluded from wages

As defined by the IRS, assistance is provided through the Eligible Adoption-Assistance Program, so long as employer-provided adoption support is excluded from certain federal holding taxes.

The IRS allows employers to pay all or some of their deductions from the federal income tax by paying for or increasing payments made to employees participating in the program.

However, payments from Medicare, Social Security, and federal unemployment, or FUTA, taxes are not excluded. Employers report receiving employee support forms in W-2, wage and tax details.

Qualified Adoption Assistance Program

The IRS requires employers to meet certain criteria to qualify for the Employment Assistance Program. Companies must create written plans and plans must meet specific requirements regarding how the programs are defined.

The program must benefit qualified employees under the employer’s rules, which are a priority for owners, high-paid employees, shareholders, or those dependent on that group. Cannot offer palliative treatment.

The plan must inform employers of qualified employees about the program and be required to provide evidence to participating employees that the funds were used to pay eligible adoption costs.

Eligible adoption expenses

The IRS defines eligible adoption costs that are considered necessary and reasonable, such as receiving fees, attorney fees, court costs, and travel expenses. Other adoption costs qualify if they result directly from an adoption attempt or adoption of a competent child.

Stepchildren and children born through the Surrogacy Agreement are ineligible. Employer acceptance assistance cannot be used for expenses incurred with funding from a government program or other organization.

In addition, employers will not be able to use acceptance assistance if the same costs are used to claim a discount or credit on a federal tax return.

Maximum magnification amount

The IRS establishes the maximum amount of employer-provided adoption assistance that can be deducted from wages.

The maximum exclusion amount was 212, 12,650. The IRS also limits the total exclusion of people with modified gross income or MAGI below a certain level.

In 2002, people with a Maggi greater than $ 229,710 were not allowed to receive the full exclusion amount.

Participants exclude acceptance at the time of payment by the employer. Special rules apply for non-United States citizens

Are employer-provided adoption benefits taxable

Permitted Tax-Exempt Benefits

The nontaxable benefits that can be offered under a cafeteria plan are:

  1. Accident and health plans, including plans that pay insurance premiums (including supplemental insurance policies such as cancer insurance) and health flexible spending accounts (subject to certain limits);
  2. Accidental death and dismemberment benefits and business travel accident insurance;
  3. Long-term disability or short-term disability insurance;
  4. Premiums for COBRA continuation coverage;
  5. $50,000 of group term life insurance;
  6. Dependent care assistance up to $5,000 each year (or $2,500 each year for participants who are married and file separately);
  7. Adoption assistance;
  8. Deferrals under Section 40l(k) qualified retirement plans (including after-tax employee contributions that are subject to Section 401(m));
  9. Contributions to health savings accounts;
  10. Any other tax-exempt benefit permitted under regulations; and
  11. Payment or reimbursement of substantiated individual accident and health insurance premiums.

Permitted taxable benefits

Most plans offer only a few limited types of taxable benefits that historically have been permitted as plan benefits. This will answer are employer-provided adoption benefits taxable or not. Those taxable benefits include:

  1. Group term life insurance that is either in excess of $50,000 or discriminatory;
  2. Dependent care assistance that is taxable because it exceeds the Section 129 dollar limit, is discriminatory, or is used for certain types of child care that are excludable—for example, overnight camp expenses and care of 13- or 14-year-old children;
  3. After-tax contributions to a qualified profit-sharing or stock bonus plan that is subject to Section 401(m) nondiscrimination rules;
  4. Vacation days, if they cannot be used or cashed out in a subsequent plan year;
  5. Long-term disability coverage; and
  6. Any other benefit that does not defer the receipt of compensation.

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