QUESTION: An employee has asked us to consider adding an adoption assistance benefit. There is also a tax credit for adoption expenses, so, as a small company with a tight benefits budget, would it make sense for us to offer an adoption assistance plan of our own?
ANSWER: The Code does have a generous tax credit for qualified adoption expenses. For 2026, the maximum credit is $17,670 per child—the same as the maximum nontaxable reimbursement by an employer’s qualified adoption assistance program—and a portion of the tax credit is refundable (up to $5,120 in 2026). If an employer has an adoption assistance benefit, employees can choose whether to take the federal tax credit for a qualified expense or submit that expense to the employer-provided program for reimbursement. Employees may take full advantage of both the credit and the exclusion for employer reimbursements but not for the same expenses. Here are some other points to consider:
- Adoption expenses frequently exceed the maximum tax credit. Many adoptions result in expenses that exceed the maximum tax credit. Employer reimbursements can be used to reduce the burden of those additional
- Because employer-provided adoption benefits are subject to FICA, most employees will use the tax credit first. For many taxpayers, the tax credit is economically superior to an employer-provided reimbursement because payments under an adoption assistance program are considered wages subject to FICA but the adoption tax credit is not. Consequently, employees who do not have enough expenses to fully utilize both the tax credit and the adoption assistance exclusion will likely exhaust the credit before seeking reimbursement from an adoption assistance program.
- Lower-income employees may be unable to take full advantage of the credit. Although a portion of the tax credit is refundable, the value of the credit’s nonrefundable portion is limited by the employee’s federal income tax liability. While any unused nonrefundable portion of the tax credits may be carried forward up to five years, every year the credit is delayed reduces its present value, and after five years, the unused credits expire.
- Employer-provided adoption benefits can help employees’ cash flow. Employees may not have sufficient liquid assets to pay adoption expenses. Direct payment or prompt reimbursement by an employer may reduce this burden and lower the overall cost of adoption by eliminating or diminishing employees’ need to borrow to cover their costs.
- Adoption assistance plans can provide tax benefits to employees even if the employer pays nothing. While employers commonly contribute to their adoption assistance benefit programs, a qualified adoption assistance program can also provide meaningful financial benefits without any employer contributions (other than the cost of establishing and administering the program). First, adoption assistance benefits may be offered under a cafeteria plan and paid for entirely with pre-tax salary reductions. (The appeal of this approach is somewhat diminished by the irrevocable election, “use-or-lose,” and other cafeteria plan requirements.) Second, the unique rules for special-needs adoptions allow employees to obtain a substantial income tax exclusion if their employer has a qualified adoption assistance program, regardless of how much the employer contributes. If the employer has the right documentation in place, even employers on very tight budgets can help employees lower their federal income taxes when they adopt children with special needs.
- Employee interest and appreciation. Current and prospective employees may consider the presence or absence of adoption assistance benefits when evaluating whether an employer is “family friendly.” And most employers offer health benefits that subsidize the cost of having biological children, so adoption assistance benefits may be seen as providing some measure of equity in the treatment of adoptive parents.
For more information, see EBIA’s Fringe Benefits manual at Section III (“Qualified Adoption Assistance Programs”).
Take your tax and accounting research to the next level with Checkpoint Edge and CoCounsel. Get instant access to AI-assisted research, expert-approved answers, and cutting-edge tools like Advisory Maps and State Charts. Try it today and transform the way you work! Subscribe now and discover a smarter way to find answers.
