The Yearly Limit and Income Phase-Out on Adoption Assistance
Employer adoption assistance can be excluded from an employee’s income up to a yearly dollar limit per adoption, and the exclusion shrinks for higher earners through a phase-out.
What to know.
The IRS adjusts the dollar limit and the phase-out range each year, so check the current figures. The exclusion applies to qualified adoption expenses paid under a written program.
The phase-out depends on the employee’s income, not the employer’s, so employees should check their own situation with a tax adviser.
Where to look next.
Adoption Assistance Overview
How the program works end to end.
Education and Giving Benefits
Related programs.
Cafeteria Plans
The rules these programs sit near.
Setting up the program so it holds up.
The exclusion depends on a written adoption assistance program. The document should state who is eligible, which expenses qualify, any dollar ceilings the employer chooses, and how employees claim reimbursement. A program that is not in writing, or that favors highly compensated employees, risks losing the tax treatment.
Administration matters as much as design. Collect receipts and proof of the adoption, track payments by employee and adoption, and report them correctly on payroll. Because the dollar limit and phase-out change each year, check the current figures before each plan year, and tell employees that their own tax situation decides how much benefit they keep.
Common questions on this topic.
Four questions to settle before you rely on it.
Is the limit per child or per year?
It is set per adoption. Check the current rules.
Who is affected by the phase-out?
Higher-earning employees. It depends on their own income.
Does it change every year?
Yes. The limit and the phase-out range are adjusted.
Does the employer have to do anything?
Have a written program and track the payments.
Does the employee need to finish the adoption to be reimbursed?
Rules differ for adoptions that do not finish, and for special needs adoptions. Check the current IRS guidance and ask a tax adviser.
Can the program favor executives?
No. Nondiscrimination rules apply, so the program should not favor highly compensated employees. Review the plan with counsel.
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General information, not legal or tax advice. Plan-specific questions belong with your counsel or CPA, and we will bring them in.
Related guides.
Adoption Assistance Program
The overview this page belongs to.
Compliance Services
How CFH supports the compliance side of your plans.
Which Adoption Expenses Qualify
A related question on the same program.
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.
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