Adoption Assistance Benefits Provided To Employees May Be Non-Taxable
If you provide adoption assistance benefits to your employees, a recent change in state law
adopts the provisions of Section 125 of the Internal Revenue Code (IRC) and may make
adoption related expense payments nontaxable to employees for state Personal Income Tax
(PIT) withholding purposes.
Section 137 of the IRC states than an employer's payments for qualified adoption expenses
under an adoption assistance program are not subject for federal income tax withholding.
Adoption assistance offered by an employer under an established adoption plan-whether part
of a cafeteria plan or not-is excluded from PIT withholding and is not reportable
as PIT wages.
This also means that for state tax purposes, payments made both into and from a qualified
cafeteria plan are not subject to PIT withholding.
APPLIES ONLY TO PIT WAGES:
Note that the changes in taxability of adoption assistance benefits apply only to
PIT wages, not total subject wages. There is no provision in the California Unemployment Insurance
Code which excludes these benefits from wages for Unemployment Insurance, Employment
Training Tax, and State Disability Insurance purposes, regardless of whether or not an
employer offers the benefit as part of a qualified IRC Section 125 cafeteria plan.
These changes in treatment of adoption assistance benefits for PIT purposes were enacted
retroactive to January 1, 1997.
CAVEAT: The information contained in this article is meant to provide the reader with an
overview of the subject matter. The laws relating to the above information will vary from
state to state and the advice of counsel should be sought. Should you entertain any
questions, please feel free to contact MARC WIDELOCK at 1-800-MR-STORK.
M.D. Widelock is a California attorney whose practice is limited to independent adoptions
and reproductive law. Mr. Widelock has served as a member of the California State Bar Standing
Committee on Adoptions (South). Mr. Widelock is a law professor and his firm has provided
commentary on family law and related issues to CNN, BBC and Current Affair. He has helped
hundreds of people create families throughout the United States by making the adoption
experience a good one for all.
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