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Growing your family through adoption: How pre-tax benefits can help!

happy family after adoption assistance

Let’s start by saying congratulations on your growing family! Families grow for different reasons, but about 135,000 children join their forever families through adoption each year in the United States. However, adoption can be an expensive decision. According to a November 2018 article from SHRM “Adopting a child from foster care may cost about $2,500, domestic private adoptions can cost up to $40,000, and international adoptions can cost up to $30,000.” Needless to say, families can use all the help they can get when pursuing adoption.

Let’s explore how adoption assistance accounts, dependent care accounts and other related benefits changes lend a financial hand.

Adoption Assistance Accounts

Adoption Assistance Accounts allow employees to set aside funds on a pre-tax basis to pay for adoption-related expenses.

What are eligible adoption-related expenses?

Acceptable adoption-related expenses are defined in section 23(d)(1), which include:

  • Reasonable and necessary adoption fees,
  • Court costs and attorney fees,
  • Traveling expenses (including amounts spent for meals and lodging while away from home), and
  • Other expenses that are directly related to and for the principal purpose of the legal adoption of an eligible child.
What is the maximum amount that can be set aside?

Adoption assistance programs provided through an employer-sponsored plan allow employees to exclude up to $14,080 from their taxable income in 2019. This amount is adjusted for inflation each year. As an employee’s income increases, the amount that can be excluded from an employee’s annual earnings begins to phase out.

  • Phase out begins for employees with modified adjusted gross income higher than $211,160.
  • Benefits are not available if modified adjusted gross income exceeds $251,160.

Employees may also want to consider the Adoption Credit, which alternatively allows individuals to claim a credit on their taxes. In some cases, both an adoption assistance account and the adoption credit are possible. In these cases, the expenses claimed for each cannot overlap (no double dipping).

What do you need to know about an Adoption Election?

An Adoption Assistance Account must be elected during open enrollment. The tax year for which you can claim the credit depends on when the expenses are paid; whether it’s a domestic adoption or a foreign adoption; and when, if ever, the adoption was finalized. Employees choosing to take advantage of an Adoption Assistance Account should be vigilant in understanding when services will be provided before making an election.

Dependent Care Election and other related benefits changes

Adoption discussions often focus on Adoption Assistance programs and other items directly related to the adoption itself. While this is great, it is only the first step.

The fact is adoption is a qualifying life event, just like giving birth to a child. This means employees who have recently adopted a child are eligible for a special enrollment period. Key changes they might consider include:

  • Switching health benefits from single coverage to single + child or family coverage.
  • Electing a Dependent Care FSA to pay for child care expense they will now incur for the child.
  • Increasing a Medical FSA election to account for new medical expenses.

If you are planning to expand your family through adoption, check with your employer to see what options might be available. You might just find a helping hand.