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Real Money: What you need to know about adoption and your FSA

Living Well

The process of adopting a child is both exhausting and exhilarating. But above all, it's life-changing. We've talked a lot about FSA-eligible items for children and even how to use your dependent care FSA (DCFSA) to save money on child care, but we haven't talked as much about adoption and how it relates to your FSA.

Let's start with the obvious: Adopting a child is expensive, and even though you can't use your FSA to pay for adoption fees, you can use it to pay for related medical expenses and pre-adoption counseling. Plus, once you've completed the adoption process, you'll be able to use your tax-advantaged accounts to pay for doctor's visits and other eligible medical expenses just as you would for a biological child.

While you're going through the legal process of adoption—applying, meeting the physical requirements, home checks and more—there are unique regulations about what is FSA-eligible and what isn't.

Adoption fees are not eligible

Unfortunately, fees associated with the adoption aren't FSA-eligible. This means that you can't use your FSA to pay for them. But be sure to check for other benefits from your employer that might be able to help with the initial costs though. (For example, some companies offer a small stipend to help offset some of the cost of adoption.)

Pre-adoption counseling is eligible

Pre-adoption counseling is similar to regular counseling and is the process of talking with a professional about your hopes and fears. Of course, the difference with pre-adoption counseling is that it's specifically related to your feelings about adoption.

Most certified mental health professionals (like licensed marriage and family therapists) are able to provide pre-adoption counseling. This expense is similar to any other mental health expense—you'll be able to apply for FSA reimbursement through your employer (although we always recommend checking in with your FSA administrator before incurring the expense to see exactly what types of documentation they'll require and to find out about any potential plan limitations which would not cover this expense)..

Pre-adoption medical expenses are eligible

Prospective parents who apply to adopt a child are often required to complete physical exams and even blood work. If medical tests are required through your adoption agency or the county, you'll be able to apply for FSA reimbursement through your FSA administrator just as you would for other medical expenses.

After the legal adoption

When it comes to adoption and how it affects your taxes (and pre-tax accounts) there are few specific requirements that must be met before your adopted child can qualify as a tax dependent.

Here's what you need:

  • Adoption decree
  • Social security card
  • Amended birth certificate

Once you have all of your documents and your child becomes a legal tax dependent, you'll be able to pay for your child's medical expenses with your HSA or DCFSA, if applicable. If you have an FSA and/or HRA, your child will qualify regardless of tax dependent status.

Dependent care is eligible

Once your adopted child is a legal dependent, you'll be able to use your dependent care FSA (DCFSA) to pay for childcare or after-school programs while you're at work. Here are the requirements—your child must be under age 13 and you and your spouse need to be either gainfully employed or seeking gainful employment.

You can contribute the maximum per year towards your DCFSA, which is $5,000 per household, or $2,500 if married and filing separately. Utilizing your DCFSA is a great way to save some money on childcare expenses, which can add up fast.

Enjoy this new chapter

There's a lot to think about when it comes to adoption, but the most important thing to remember is that this is a special time in your life. Welcoming a child into your home is a wonderful gift for both you and the child. Plus, here's some good news—you're already one step ahead by being financially prepared.

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Whether you budget week-to-week, or plan to use your FSA for bigger things, our weekly Real Money column will help you maximize your flex spending dollars. Look for it every Tuesday, exclusively on the FSAstore.com Learning Center. And for the latest info about your health and financial wellness, be sure to follow us on Facebook, Instagram and Twitter.

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