In this article, we’re going to be discussing some more focused Spending Accounts that focus on and cover very particular items. The Adoption Assistance Programs or FSA’s, whatever you would like to refer to them as, are going to cover Adoption and Adoption related expenses.
There’s lots of nuances here, so at the employee level, you certainly want to understand what your employer plan covers but also you want to have some discussions with an accountant or a tax professional, as there are several tax implications that you will want to be aware of. Stay tuned.
Employers, we recommend setting these up as flexibly (no pun intended, ok, maybe) as possible so your staff can maximize their tax savings but we suggest you always encourage employees to consult with their tax preparers as well. This is key.
Adoption Assistance Programs, sometimes referred to as Adoption Assistance Flexible Spending Accounts (FSA’s)
As I am sure you have guessed, Adoption Assistance Programs or Adoption Assistance FSA’s allow employees and/or employers to put money aside to help offset the high costs of adoption. This is one that I would say is a little tricky, as if you are looking to adopt, you don’t always know when it’s going to go through so you may not want to put a ton of money into this through your employer’s program, as you may not be able to get it back (depending on plan setup).
Some plans will allow for assistance on these costs whether the adoption goes through or NOT (this is up to the employer when setting them up but is what we would recommend) so if that is allowed, it is a little less risky. You are pretty much guaranteed costs related to an adoption as soon as you start the process, which in some instances may take a while and end up stretching out over multiple years.
One other thing to consider, there’s also adoption tax credits available but you can’t receive both so be sure you talk to your CPA or financial adviser here as it could be better to wait and get the tax credit once the adoption goes through. But like everything, planning is key.
If you or one of your employees are going through this process and spend this kind of money (costs can exceed 6 figures), you (or they) will want to maximize any potential tax savings as much as possible. This is not an inexpensive process for someone who is trying to adopt a child, but as I am sure you can imagine, it can certainly be a very meaningful and important one. People who adopt are heroes.
There’s very little cost on the employer side to make available this kind of offering (or any spending account for that matter). Mainly it requires time to conduct some research to see what does or doesn’t work for your employees. If nobody plans to adopt in your ranks anytime soon, there’s probably no need to set up this type of benefit unless you want it on paper for recruiting purposes.
Here’s the mechanics and pointers in the same format we used in the prior article (click here).
Items allowed to be paid
Expenses related to adopting a child (think adoption fees, court costs, attorney fees, travel costs, etc.).
Employers can dictate the specifics when the plan is being setup.
Immediate Max Payout?
No (this is different from a Health or Limited Purpose FSA), funds must be available in order to file claims (just like a checking account).
Maximums Contributions Allowed
$15,990; high income earners have a sliding, decreasing scale or benefit / tax write off potential (talk to your CPA)
Immediate Tax Benefits
Yes, deductions can be setup to be removed from employee’s paychecks on a pre-tax basis meaning the expenses, once paid get paid with pre-tax dollars. The deduction on the check also means the employee is getting an immediate tax savings AND the employer’s payroll taxes are being reduced.
Funded By?
Most commonly, employees but employers can help fund the accounts as well.
Gotchas?
There are 2, one is similar to what was previously stated and one is unique:
- Similar to what we’ve discussed with all of these types of accounts, this is a use it or lose it type situation. If you put too much money into your account and don’t have the ability to use it all up by the end of the plan year, you could be out those dollars. You’ll still get the lower taxable income based on what you put in, but you could get in a situation where you can’t use up all of the funds for claims. Contribute with caution and make sure you understand what fees / costs your plan will and won’t cover if the adoption does NOT take place in that given plan year.
- There is also a tax credit available from the IRS on your tax return but there are a lot of moving parts – your household income, where the child is being adopted from, etc. Know and understand these before contributing so you know what you are putting in you can claim later and get the tax benefit. You’ll want to talk to your CPA or a financial professional to make sure you are maximizing your tax savings AND not losing money.
Thanks so much for following along! Should you have any questions about HSAs, FSAs, etc., we are always here to help! Drop us a line today!
