How is adoption assistance offered through a cafeteria plan?
Under a cafeteria plan, an employee elects to have a specified dollar amount of wages or salary reduced (that is, withheld before taxes) and credited to an unfunded spending account that is used to reimburse the employee’s qualified adoption expenses. This salary reduction election should be made before the plan year in which adoption expenses are incurred. The amount of the salary reduction is not subject to either income tax withholding or Social Security and Medicare (FICA) taxes. The employee then applies for reimbursement of eligible adoption expenses paid or incurred during the year, drawing down the spending account. Although the salary reduction amounts contributed to the spending accounts are exempt from income tax withholding and FICA taxes (see above), reimbursements from them are subject to FICA taxes. Reimbursements are also exempt from income tax withholding (unless the plan or the employee fails to comply with the Section 125 or Section 137 requirements). If a domestic a
