If an employee is adopting a child, a cafeteria plan can reimburse up to $10,630 of adoption expenses.
Employees can only take the reimbursement once per child. So, if the adoption process spans several years, they need to consider which year is best for this reimbursement. This benefit is gradually phased out based on adjusted gross income.
Your employees may benefit by using the adoption assistance as a tax credit. The $10,630 limit is the same as if the reimbursement is filed through a cafeteria plan. If they are in at least the 25% tax bracket, paying for adoption expenses through the cafeteria plan will likely save them more than the credit. An employer may effectively provide adoption assistance without any direct cash outlay simply by offering adoption assistance as a qualified benefit under an existing Section 125 cafeteria plan. If an employer already maintains a cafeteria plan for its employees, then it should consider implementing an adoption assistance plan that is funded solely through an employee's salary reduction elections. To implement an adoption assistance plan, the plan or program must satisfy the following requirements:
- It must be established in a separate written document;
- It must limit eligibility to employees;
- It must provide reasonable notice to employees; and
- It must require substantiation of qualified adoption assistance expenses.
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