Should You Add Adoption Benefits to Your Employee Benefits?

A growing number of employers are offering adoption benefits as part of their employee benefits package. According to employers, advantages to offering this benefit include employee retention, equity in benefits for all employees, and a positive public image. Here are the types of benefits commonly offered and the legal and tax implications associated with employee adoption benefits.

Types of Benefits

Adoption benefits can take many forms but are divided into three categories: information resources, financial assistance, and time off.

Information Resources

These resources can include referrals to adoption agencies and support groups and access to other information. Employers may contract with a human resources consulting firm to offer these services.

Financial Assistance

Adoptions are very expensive, including fees, travel, court, and other expenses. Some employers offer a lump sum payment to help with adoption expenses. Others may pay certain fees, including legal fees, medical expenses for the child, counseling fees, agency fees, and travel expenses. 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 the 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 offer paid and/or extended leave in place of or in conjunction with the FMLA leave.

Legal Considerations

HIPAA

A special enrollment period exists for employer-sponsored health plans for new dependents, including adopted children. If an adopted child is enrolled in the plan within 30 days of the adoption, then 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 receives 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 2024, the excludable amount is $16,810.
• For taxable years beginning in 2025, the excludable amount is $17,280.

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. For 2025, the excludable amount begins to phase out for those with a modified AGI of $259,190 and is completely phased out for those with a modified AGI of $299,190 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. The maximum credit allowed for taxable years beginning in 2024 is $16,810 ($17,280 for taxable years beginning in 2025). The tax credit must be from expenses the employee paid themselves that were not refunded by the employer.

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. For 2025, the excludable amount begins to phase out for those with a modified AGI above $259,190 and is completely phased out for those with a modified AGI of $299,190 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 under age 18 at the time of adoption or is physically or mentally unable to care for themselves. Qualified adoption expenses include adoption fees, court costs, attorney fees, traveling expenses (including meals and lodging), and other expenses 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, they will likely be more interested in working for a company that truly supports adoption than a company that does not. Do some research to determine if offering adoption benefits is an option for you.

© 2024 Zywave, Inc. All rights reserved.

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