Client Services
Employee Communication: Plan Overview
How the Plan Can Pay You for Your Adoption Costs
The [Name of Company] has adopted the [Name of Company] Adoption Assistance Plan to reimburse expenses incurred for the adoption of a child using your compensation reduction amounts under the Section 125 cafeteria plan. You can use your Qualified Adoption Assistance Spending Account to pay for most unreimbursed adoption expenses, provided that they are “qualified adoption expenses.” There are four important points to keep in mind about your requests for Qualified Adoption Assistance Spending Account reimbursements:
1. Your request must be for a qualified adoption assistance expense incurred by you or your spouse during the plan year for the adoption of an eligible child.
2. The expense must be for services or fees incurred during the plan year, regardless of when you are billed for those services. Note: Special rules apply for international adoptions and the adoption of a child with special needs. If this is an international adoption, the reimbursement will be taxable if it is received in a year prior to the adoption becoming final. When the adoption is final, you will take an “above-the-line” deduction to claim your tax benefit.
3. The expense must not be reimbursed or reimbursable from any other source.
4. Your request must be accompanied by appropriate documents substantiating the expense.
It is important to remember that if you are reimbursed by the Plan for a particular qualified adoption assistance expense, then you cannot claim the same expense as a deduction or credit on your Federal income tax return and you must not receive reimbursement of the same expense from any other source. In addition, income taxes may apply to any erroneous reimbursements (such as any reimbursement that is paid for an ineligible expense or if your income exceeds the income limitations).
If you are not sure whether an expense qualifies for reimbursement under your Qualified Adoption Assistance Spending Account, please contact the plan administrator.
Eligible Child
An eligible child is an individual who has not attained age 18 or who is physically or mentally incapable of caring for himself or herself. An eligible child may not be a child of either spouse.
Qualified Expenses
In general, adoption assistance expenses that qualify for reimbursement include reasonable and necessary amounts paid for:
(a) adoption fees;
(b) court costs;
(c) attorneys’ fees;
(d) traveling expenses (including amounts expended for meals and lodging);
(e) expenses required by a state as a condition of adoption, including but not limited to the cost of construction, renovations, alterations or purchases specifically required by the State to meet the needs of the child; and
(f) any other reasonable and necessary expenses that are directly related to, and the principal purpose of which is for, the legal adoption of an eligible child.
Limitation on Expenses
You may not be reimbursed from the Qualified Adoption Assistance Spending Account for any expenses:
(a) for which a deduction or credit is taken under any other provision of the Internal Revenue Code;
(b) to the extent the funds for the expenses are received under any Federal, State, or local program;
(c) incurred in violation of state or federal law;
(d) incurred in carrying out any surrogate parenting arrangement;
(e) incurred in connection with your adoption of your spouse’s existing child or vice versa;
(f) incurred prior to the adoption of the Plan; or
(g) that are reimbursed under an employer adoption assistance program (for purposes of the tax credit) or other payment or reimbursement program.
Even though you may not have a double tax benefit for the same expenditure, you may still claim both a tax credit and an income exclusion for different qualified adoption expenses incurred for adopting the same child.
Adoption of a Child with Special Needs and “Deemed Expenses”
A very unique and advantageous rule applies to the calculation of adoption expenses for a child with special needs. The federal government has enacted even greater incentives to encourage such adoptions. You are eligible for reimbursement from the plan and to claim the income exclusion regardless of whether you have any actual adoption expenses. In other words, if your actual adoption expenses for the adoption of a child with special needs are less than the maximum exclusion amount, your qualified adoption expenses are increased in the year the adoption is finalized by "deemed adoption expenses": the difference between the $12,150 (for 2009) maximum and the total actual qualified expenses for the adoption incurred during that year and all prior taxable years.
A child with special needs is:
(a) a U.S. citizen or resident at the time the adoption process commences; and
(b) who the State has determined:(1) cannot or should not be returned to the home of the birth parents, and
(2) has a specific factor or condition because of which it is reasonable to conclude that the child cannot be placed with adoptive parents without adoption assistance. Examples of such factors or conditions include, but are not limited to the child’s:(A) ethnic background,
(B) age,
(C) membership in a minority group,
(D) being one of a group of siblings awaiting adoption together,
(E) medical condition, or
(F) physical, mental, or emotional handicap.
These deemed expenses can be reimbursed on a tax-free basis only when a State has made a determination that the adoptee is a child with special needs. Determinations of special needs status are made by State child welfare agencies based on that State’s standards.
Adoption Expenses and Benefits in Multiple Years
Adoptions often take a considerable length of time and expenses may be incurred throughout the adoption process (and even after an adoption has been finalized). As a result, the adoption expenses reported for a single calendar year may be less than the total qualified expenses actually incurred for the adoption of a child. In general, adoption expenses are incurred for tax purposes when they are actually incurred. However, the Plan incorporates special rules for when adoption expenses are treated as incurred for international adoptions and the deemed expense portion for the adoption of a child with special needs. Note: Different rules apply for tax credit purposes and are described in Form 8839, Qualified Adoption Expenses.
Adoption of a Child with Special Needs-Deemed Expenses – Deemed adoption expenses ($12,150 minus the total actual qualified adoption expenses) are treated as if they are incurred in the year in which the special needs adoption is final.
International Adoptions – In an international adoption, qualified adoption expenses for purposes of employer reimbursements are treated as having been incurred in the later of the year the adoption is finalized or the year the expenses are actually incurred. If you receive adoption assistance reimbursements in a year before an international adoption is final, you must include the payments in your income in the year of payment. Then in the year the adoption becomes final, you can make an adjustment on your return to take the exclusion. See Form 8839 and its instructions.
Manner of Making Payments
To obtain reimbursement of an eligible qualified adoption assistance expense incurred during the plan year, you must provide the plan administrator with satisfactory evidence that such qualified adoption assistance expenses were incurred during the plan year and have not been previously reimbursed. Claims for qualified adoption assistance expenses must be submitted on claim forms provided by the plan administrator, and must include itemized bills or receipts reflecting the following information:
(a) Name of qualified adoption assistance provider;
(b) Date items or services are provided;
(c) Nature of service or item; and
(d) Itemized charge for each service and item.
Qualified adoption assistance expenses must be timely and properly reported by the end of the third month following the end of such plan year. Otherwise, they will not be reimbursed under the Plan.
