Every year, thousands of U.S. families adopt a child and need to pay for adoption expenses, which can be costly.
But there is a way that companies can help employees embarking on this life journey – through an Adoption Assistance Program.
An Adoption Assistance Program (AAP) account is an employer-sponsored spending account that allows both employer and employee contributions to pay for eligible adoption-related expenses. Contributions are pretax and can be deducted from participating employees’ paychecks to fund the AAP account. The employee decides how much to contribute, tax-free, for the year, up to $14,440 per child1, the Internal Revenue Service (IRS) limit for 2021.
Why should employers consider adding an AAP to their benefits package?
Three reasons why a growing number of companies offer an AAP:
- Adoption benefits are a low-cost, high-impact benefit.2 Employers have discovered that the employee goodwill derived from offering this benefit is significant. When employees hear that a co-worker is using the adoption benefit, they view the employer as supportive of families. This helps create a positive perception of the company among both users and nonusers of the benefit.
- Offering a robust benefit package that includes AAP demonstrates an employer’s commitment to equitably supporting employees and their children – both biological and adoptive. Each year 135,000 children are adopted in the U.S., costing an approximately $40,000 for a private, domestic adoption and roughly $50,000 for an international adoption, exceeding the annual salary of 37% of the U.S. population.3
- An AAP may give employers a competitive edge in recruitment and retention of employees, increasing employee loyalty. Ten percent of employers offer some type of adoption assistance and contribute an average of $7,000 to employee adoptions.3
What expenses are eligible for reimbursement?
Eligible expenses include any out-of-pocket expenses related to the adoption of an eligible child as identified under section 23 of the Internal Revenue Code, including, but not limited to:
- adoption application and home study fees
- legal fees and court costs
- reasonable travel and lodging expenses
- expenses related to foreign adoptions
Employees need to plan wisely when estimating how much money they will need for adoption-related expenses. For domestic adoptions, employees can submit claims as the expenses occur. For foreign adoptions, the adoption must be successful before expenses can be submitted and paid. Like a Flexible Spending Account (FSA), the “use-it-or-lose-it” rule applies, and any unused money will be forfeited at the end of the plan year.
1Per IRS regulations, Further’s AAP is available to employees with a Modified Adjusted Gross Income (MAGI) of $216,659 or less. If an employee’s MAGI is more than $216,660 but less than $256,660, they can contribute a portion of the $14,440 limit per child in 2021. Those employees with a MAGI of $256,660 are not eligible for this benefit.
2Meinert, Dori. Cover package: Benefits Families First. Adoption benefits can generate employee good will at low cost. Sep 1, 2013. https://www.shrm.org/hr-today/news/hr-magazine/pages/0913-adoption-benefits.aspx
3Managing adoption assistance benefits. Society for Human Resources Management (SHRM) Tool Kit. https://www.shrm.org/resourcesandtools/tools-and-samples/toolkits/pages/adoptionassistancebenefits.aspx.