What an Adoption Assistance Program Does
Under Internal Revenue Code Section 137, an employer can reimburse an employee’s qualified adoption expenses and exclude the amount from the employee’s income. It is a small, cheap benefit that lands with unusual weight on the people who use it.
| 2026 | |
|---|---|
| Maximum exclusion per child | $17,670 |
| Same amount for a child with special needs | $17,670 |
| Phase-out range (modified adjusted gross income) | $265,080 – $305,080 |
The figures are set by IRS Rev. Proc. 2025-32 and adjusted annually.
Related: how we help employers improve workforce health and control healthcare costs all year, not just at renewal.
The Payroll Trap
This is the part employers get wrong, and it is worth putting plainly: Section 137 excludes adoption assistance from income tax, not from payroll tax.
The amount remains subject to Social Security and Medicare taxes and to federal unemployment tax. Payroll must withhold FICA on it while withholding no income tax — an unusual combination that automated systems do not always handle correctly, and one that surfaces as a W-2 correction months later if it is missed. Tell your payroll provider before the first reimbursement, not after.
What Qualifies
- Adoption fees, court costs and attorney fees.
- Travel expenses directly related to the adoption, including meals and lodging while away from home.
- Other expenses reasonable and necessary to a legal adoption.
Expenses for adopting a spouse’s child do not qualify, nor do costs already reimbursed under another programme or by a government scheme.
What the Plan Requires
- A separate written plan for the exclusive benefit of employees.
- Reasonable notice to eligible employees that the benefit exists — an unannounced benefit helps nobody.
- No discrimination in favour of highly compensated employees.
- No more than 5% of benefits going to more-than-5% owners or their families.
Why It Is Worth the Small Effort
Take-up is low by nature, so the cost to the employer is modest and only arises when someone actually adopts. What makes it worth having is the asymmetry: the employee facing adoption costs is dealing with a large, unplanned and largely uninsurable expense, and an employer that helps with it is remembered for it.
It also sits naturally alongside the other accounts you may already run — dependent care, education assistance and the rest — and can usually be added without new administration. If you want it set up, we can handle the plan and coordinate it with payroll so the FICA treatment is right from the first payment.
Questions We Get
How much adoption assistance can an employer provide tax-free?
Up to $17,670 per child for 2026 under Internal Revenue Code Section 137, set by IRS Rev. Proc. 2025-32. The same figure applies to the adoption of a child with special needs. The exclusion phases out for employees with modified adjusted gross income between $265,080 and $305,080.
Is adoption assistance exempt from payroll taxes?
No, and this is the detail that surprises people. Section 137 excludes the benefit from income tax, but the amount remains subject to Social Security and Medicare taxes and to FUTA. Payroll has to withhold FICA on it even though no income tax is withheld — getting this wrong produces a W-2 correction later.
What counts as a qualified adoption expense?
Reasonable and necessary adoption fees, court costs, attorney fees, and travel expenses including meals and lodging while away from home, all directly related to a legal adoption. Expenses for adopting a spouse’s child do not qualify, and neither do costs reimbursed under another programme.
Do we need a written plan?
Yes. Section 137 requires a separate written plan for the exclusive benefit of employees, with reasonable notice of its availability, and it cannot discriminate in favour of highly compensated employees. No more than 5% of benefits may go to more-than-5% owners or their families.
Can an employee claim the adoption tax credit as well?
Potentially, but not for the same expenses. The employer exclusion under Section 137 and the adoption credit under Section 23 are separate provisions with the same dollar limit, and an employee cannot apply both to one expense. Employees with costs above the limit are the ones most likely to use both.
Is adoption assistance expensive to offer?
It is usually among the least expensive benefits an employer can add, because take-up is low and the cost is incurred only when someone adopts. For most employers it is a benefit that is noticed far out of proportion to what it costs.
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