Adoption costs a great deal up front. An employer program can pay part of it tax-free.
An adoption assistance program reimburses employees for the fees, court costs, attorney fees and travel that come with adopting a child. Under Section 137 of the tax code, a written program can exclude a set amount per child from the employee’s income, and it is a benefit few employers offer, so it stands out.
A written program, a yearly limit and a few traps.
The exclusion is real, but it has conditions about the plan, the expenses and who benefits.
A Written Program
Section 137 requires a separate written plan for the exclusive benefit of employees, with eligibility rules that do not favor highly compensated employees. A one-off reimbursement to a single executive does not qualify.
Qualifying Expenses
Reasonable adoption fees, court costs, attorney fees, travel, and similar expenses directly tied to the legal adoption of an eligible child. Expenses for adopting a spouse’s child do not qualify, and neither do those that violate state or federal law.
A Yearly Limit, With a Phase-Out
The tax code caps the excludable amount per child and phases it out at higher incomes, with both amounts adjusted each year. A child with special needs is treated as having the full limit. The plan can pay more than the limit; the excess is taxable.
Payroll Tax Still Applies
Adoption assistance excluded from income tax withholding is still subject to Social Security and Medicare tax and to federal unemployment tax. The employee reports the exclusion on IRS Form 8839, and payroll needs to code it correctly.
No Double Dipping
An employee cannot claim the adoption tax credit and the exclusion for the same expense. The plan should tell employees to talk to their tax preparer before filing.
A Retention Benefit With Low Take-Up
Few employees use it in any year, so the cost is small and predictable, while the value to the people who do is large. It also sends a message that the employer supports families in every form.
What the plan document has to say.
Who Is Eligible
Which employees, after how long, and whether part-time employees count. The rules must not favor owners or highly paid employees.
What Is Paid
The list of qualifying expenses, the per-child limit and whether the plan pays directly or reimburses.
How Claims Are Proven
Receipts and documents from the agency, court or attorney, submitted within a stated time after the adoption is final or the expenses are paid.
The questions employers ask about adoption assistance.
Five questions that come before the program is written.
Is adoption assistance tax-free?
Up to the yearly limit per child, it is excluded from income tax withholding under a qualifying plan. It is still subject to Social Security, Medicare and federal unemployment tax.
Can the program pay more than the limit?
Yes, but the excess is taxable wages. Most plans set their own limit at or below the tax limit.
Does it apply to foster care or stepchild adoption?
Adopting a spouse’s child does not qualify. Foster placement costs generally do not either, unless the adoption becomes final. The plan should state what it will pay.
Does it need a plan document?
Yes. Section 137 requires a written program. An informal arrangement does not qualify.
Who reports it?
The employer reports the amount in the employee’s wages and the exclusion. The employee reports it with Form 8839 when filing.
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General information about adoption assistance programs, not legal or tax advice. Plan-specific questions belong with your tax adviser or counsel, and we will bring them in.
Related guides.
Dependent Care and Family Support
Accounts and benefits for working families.
Lifestyle and Specialty Accounts
The accounts that cover what insurance does not.
Education, Giving and Financial Wellness
Other benefits that support employees outside of health coverage.
Where the Rules Come From.
The laws and rules named on this page link to the statute or regulation they come from. This is general information, not legal or tax advice, and rules change, so check the current text.
Adoption Assistance Programs (26 U.S.C. 137)
The exclusion for employer-provided adoption assistance.
Adoption Credit (26 U.S.C. 23)
The separate credit that cannot be claimed for the same expenses.
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