May 8, 2024

A growing number of employers are offering some form of adoption benefits as part of their employee benefits package. Organizations are finding the advantages of this addition to include employee retention, equity in benefits for all employees and a positive public image.

As with many ancillary benefits, adoption benefits can take many forms, but are generally divided into three categories:

  • Information Resources: These resources can include referrals to adoption agencies, support groups and access to other information. Employers may contract with a human resource consulting firm to offer these services.
  • Financial Assistance: Adoptions are very expensive and include fees, travel, court and other expenses. Some employers choose to offer a lump sum payment to help with any adoption expenses. Others may pay certain fees, including legal fees, medical expenses for the child, counseling fees, agency fees and travel expenses, among others. In addition, some employers offer higher financial reimbursement rates for employees who adopt a child with special needs.
  • Time Off—The last type of benefit is parental leave associated with adoption. FMLA requires that employees be allowed 12 weeks of unpaid leave for the adoption of a child and care for that child during the first year. Employers may choose to offer paid and/or extended leave, in place of or in conjunction with the FMLA leave.

Legal Considerations

  • HIPAA: Employer-sponsored health plans have a special enrollment period for new dependents, including adopted children. If an adopted child enrolls in the plan within 30 days of the adoption, the child is not subject to any waiting period before coverage begins.
  • COBRA: An adopted child falls under the definition of a qualified beneficiary for COBRA purposes, even if the adoption occurred after the date of the COBRA qualifying event. In other words, if an employee is receiving COBRA benefits and adopts a child, that child can also be covered under COBRA.

Tax Exclusion

A tax exclusion is available for employees who receive adoption assistance from their employer. Up to a certain limit, employees are not taxed on employer-provided adoption assistance, unless they have a modified adjusted gross income (or modified AGI) above a certain amount.

  • For taxable years beginning in 2023, the excludable amount is $15,950.
  • For taxable years beginning in 2024, the excludable amount is $16,810.

For 2023, the excludable amount begins to phase out for those with a modified AGI above $239,230, and is completely phased out for those with a modified AGI of $279,230 or more. For 2024, the excludable amount begins to phase out for those with a modified AGI above $252,150, and is completely phased out for those with a modified AGI of $292,150 or more.

Adoption Credit

In addition, any taxpayer who adopts a child is eligible for a non-refundable tax credit for each eligible child in the same amount as the tax exclusion. For taxable years beginning in 2023, the maximum credit allowed is $15,950 ($16,810 for taxable years beginning in 2024). The tax credit must be from expenses the employee paid himself or herself that were not refunded by the employer.

For 2023, the excludable amount begins to phase out for those with a modified AGI above $239,230, and is completely phased out for those with a modified AGI of $279,230 or more. For 2024, the excludable amount begins to phase out for those with a modified AGI above $252,150, and is completely phased out for those with a modified AGI of $292,150 or more.

Qualifications

To be eligible for either the exclusion or the credit, the adopted child must qualify as an “eligible child,” and the expenses must be “qualified adoption expenses.” An eligible child is one who is under age 18 at the time of adoption or is physically or mentally unable to care for himself or herself. Qualified adoption expenses include adoption fees, court costs, attorney fees, traveling expenses (including meals and lodging) and other expenses that are directly related to the adoption.

Providing adoption benefits not only helps out your current employees, it can also help you to recruit new talent. Because adoption is expensive, confusing and takes time, if someone is planning to adopt a child, he or she will likely be more interested in working for a company that truly supports adoption than a company that does not. Do some research to find out if offering adoption benefits is an option for you.