If you have an adoption assistance program, your employees may be
able to exclude from gross income payments or reimbursements you make
for their expenses to adopt a child. Your employees cannot exclude
payments or reimbursements for adoption expenses that were incurred
before the adoption assistance program was in effect. For more
information on this exclusion, see For Adoptive Parents,
earlier.
Adoption assistance program.
An adoption assistance program is a separate written plan of an
employer that meets all of the following requirements.
- It benefits employees who qualify under rules set up by you,
which do not favor highly compensated employees or their dependents.
To determine whether your plan meets this test, do not consider
employees excluded from your plan who are covered by a collective
bargaining agreement, if there is evidence that adoption assistance
was a subject of good-faith bargaining.
- It does not pay more than 5% of its payments during the year
for shareholders or owners (or their spouses or dependents). A
shareholder or owner is someone who owns (on any day of the year) more
than 5% of the stock or of the capital or profits interest of your
business.
- You give reasonable notice of the plan to eligible
employees.
- Employees provide reasonable substantiation that payments or
reimbursements are for qualifying expenses.
An adoption assistance program can be part of your cafeteria plan.
An adoption assistance program also includes programs that reimburse
members of the Armed Forces and Coast Guard for adoption expenses.
Employment taxes.
Amounts you pay or incur under your adoption assistance program for
an employee's qualifying adoption expenses are not subject to income
tax withholding. However, these amounts are subject to social
security, Medicare, and federal unemployment taxes.
Form W-2.
You must report all qualifying adoption expenses you paid or
reimbursed under your adoption assistance program for each employee
for the year in box 12 (box 13 of a Form W-2 for 2000 or
earlier) of the employee's Form W-2. Use Code "T" to
identify this amount. Also include this amount in the totals for
social security wages in box 3 and Medicare wages in box 5. However,
do not include this amount with the employee's wages in box 1.
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