For nearly 30 years, the federal tax code has allowed employees to exclude certain employer-provided adoption assistance benefits from their taxable income. Yet, as recently as 2024, only 20% of employers offered financial assistance with adoption, according to a survey by the International Foundation of Employee Benefit Plans.
Like many businesses, yours might shy away from implementing a qualified adoption assistance program because eligible employees can claim the federal adoption tax credit on their personal returns. Although there's some overlap between the two, this benefit is still worth considering.
The cost of adoption is often high. Qualified expenses — including adoption and attorneys' fees, court costs, travel expenses and home study fees — can exceed the maximum tax credit amount of $17,670 per child in 2026. Moreover, the credit begins to phase out when an employee's modified adjusted gross income exceeds $265,080, phasing out completely when it reaches $305,080. (Note: For 2026, the federal adoption credit is partially refundable, with up to $5,120 of the credit available as a tax refund.)
The maximum income exclusion under a qualified adoption assistance program is also $17,670 per child in 2026, subject to the same income-based phaseout rules — potentially doubling the amount of tax-advantaged qualified expenses for adoptive parents. However, employees can't use the same expenses for both the credit and the exclusion.
Employees who adopt a child with special needs may be able to exclude qualified employer-provided adoption assistance up to the maximum exclusion amount, even if their actual qualified adoption expenses are less than that amount. (You can choose to limit benefits to an amount that's less than the maximum excludable amount, too.)
Qualified adoption assistance programs can also help employees better manage their cash flow. The adoption credit for individual taxpayers generally doesn't "pay off" until tax time. Employer-provided payments or reimbursements under a qualified program may enable adoptive parents to keep up with their bills throughout the year without resorting to credit cards or other costly forms of financing.
One clear strategic benefit of offering a program is its potential to improve recruiting and retention. It can help position you as an employer of choice — with a supportive, family-friendly environment. Depending on your workforce demographics, this benefit may be highly valued among job candidates and employees who are either already considering adoption or likely to do so. And the price tag is usually low, relatively speaking, because only a targeted segment of your workforce will use the program.
In fact, under some circumstances, employers don't even have to contribute to a qualified adoption assistance program. You can offer one as part of a Section 125 cafeteria plan, which allows employees to use pretax salary reductions to "buy" benefits such as coverage for eligible adoption assistance expenses. Keep in mind, however, that adoption assistance remains subject to Social Security, Medicare and federal unemployment taxes under a cafeteria plan.
Of course, you do take on an administrative burden when establishing a program. You must track payments and collect appropriate documentation from employees. You're also required to report all qualifying adoption expenses paid or reimbursed under the program on each participant's Form W-2.
According to the IRS, a qualified adoption assistance program is a separate written plan that:
For 2026, a highly compensated employee is someone who was 1) a 5% owner for any time during the year or the preceding year, or 2) in the employer's top‑paid group of employees in the preceding year and had compensation above the inflation‑adjusted threshold of $160,000 for both 2025 and 2026. Meanwhile, a shareholder or owner is treated as a more‑than‑5% owner if, on any day of the year, that individual owns more than 5% of the employer's outstanding stock (for a corporation) or more than 5% of the capital or profits interest in the employer (for a noncorporate business).
Important: More-than-2% shareholders in an S corporation, as defined under the tax code, are treated as partners rather than employees for fringe benefit purposes. Therefore, they aren't eligible for most employee benefit income exclusions, including adoption-related financial assistance. Contact your tax advisor for additional details.
Ultimately, all payments or reimbursements you make for qualified adoption expenses under your program must be excluded from an employee's wages for federal income tax withholding purposes. However, as mentioned above, these amounts are still subject to Social Security, Medicare and federal unemployment taxes.
A qualified adoption assistance program isn't right for every employer. But it may be a good addition to your benefits package if you're looking for a cost-effective way to strengthen your reputation as a family-friendly workplace.
Before implementing a program, be sure you understand the applicable tax rules, documentation requirements and payroll obligations. Your tax advisor can help you evaluate whether this benefit would make sense for your business and, if so, assist you in complying with IRS requirements.
Get in touch today and find out how we can help you meet your objectives.
