Is your company looking to spruce up its fringe benefits package? Consider offering an adoption assistance program to eligible employees. This type of plan provides tax and nontax benefits to both employers and employees. However, this incentive generally appeals only to employees who are in the child-rearing stage of life and want to have children. Because its appeal is limited, the program often is available through a cafeteria plan.
Here's a brief overview of adoption assistance programs and the payroll implications.
Under the tax code, an adoption assistance program is a plan that provides payments or reimbursements for qualified adoption expenses. Plans generally are funded by employers as a fringe benefit available to employees who choose to participate.
To qualify for favorable tax treatment, expenses must be "reasonable and necessary" and meet other requirements. For example, benefits must be provided under a written plan, and all eligible employees must be notified about the plan, even if they're unlikely to be interested in participating. The plan can't be set up to discriminate in favor of owners, officers or highly paid employees.
Some expenses typically covered under an adoption assistance program include:
Employers may establish annual and/or lifetime limits on the dollar amount of benefits employees can receive.
Normally, individuals can claim a tax credit for qualified adoption expenses on their federal tax return, up to a stated annual limit. Although the credit isn't available for payments or reimbursements received through an adoption assistance plan, adoption expenses are tax-free to employees up to a plan's limit.
For 2023, an employee can exclude from tax up to a maximum of $15,950. This amount is exempt from income tax withholding and FICA, which for 2023 is 6.2% on the first $160,200 of wages and 1.45% on all other wages. These rates also apply to the employer's share of FICA. However, there's no exclusion for federal unemployment tax under FUTA.
Unlike participating employees, employers can't claim a tax credit. But they generally can — as with other fringe benefits — deduct their expenses under the plan. You may establish your company's own annual limits on qualified expenses that are less than the maximum amount (for instance $5,000 or $10,000). If you choose this option, a portion of the benefits may be subject to taxes. Also, you're responsible for reporting benefit amounts to employees on their W-2 forms at the end of the year.
There are also nontax advantages to these plans. Many employers add them to their benefits menu to help recruit and retain talented employees. But programs that make adoption more affordable can also increase worker loyalty and enhance your company's reputation as a family-friendly organization that respects a work-life balance.
There are several steps to take before you get can get an adoption assistance program off the ground.
An adoption assistance program typically is only one of many options offered in a cafeteria plan. Depending on their needs and interests, employees can select fringe benefits that appeal to them and decline those that don't. This tends to reduce the overall cost of benefits for employers. But to help ensure your benefit offerings are assets, not financial burdens, consult with your tax and employee benefit advisors.
Get in touch today and find out how we can help you meet your objectives.
