Issue: You would like to implement an adoption assistance program for your company. In order for the financial assistance to be nontaxable, does the program need to be in writing?
Answer: Yes. Adoption assistance programs are governed under Internal Revenue Code Sec. 137, which specifies that an adoption assistance program must be a separate written plan of the employer that meets certain requirements.
Under an employer-provided program, Sec. 137 excludes from an employee’s gross income amounts furnished by the employer for adoption assistance purposes. Sec. 137 allows an employer to provide up to $14,080 in 2019 per child on an aggregate, not annual, basis for “qualified adoption expenses.” Adoptive parents’ adjusted gross income (AGI) determines the amount of the adoption expense limit that applies to them. In 2019, the credit begins to phase out at an AGI of $211,160 and is completely phased out at $251,160.
While Sec. 137 requires a written plan, it does not specify that the plan follows a particular format. At a minimum, the written plan should define the group of employees eligible to receive benefits, and describe the specific benefits offered under the program and any applicable limitations. Participation in the plan may be limited to a classification of employees determined by the employer, but the plan may not discriminate in favor of officers, shareholders, or the highly compensated or their dependents. Finally, reasonable notification of the terms and conditions of the plan must be provided to eligible employees.
Source: Internal Revenue Code Sec. 137.