Implementation of State Reimbursement of Nonrecurring Expenses for Special Needs...

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Introduction

The Department of Health and Human Services (HHS) published, in the December 14, 1988 issue of the Federal Register, final rules to implement state reimbursement of nonrecurring expenses in the adoption of special needs children (45 CFR Part 1356). Since that time the Secretariat to the Association of Administrators of the Interstate Compact on Adoption and Medical Assistance (AAICAMA) has monitored implementation of the rules by its member states. Contacts with non-member states have also been made in order to assess progress in carrying-out the new policy. The purpose of this Issue Brief is to describe, in general terms, some of the problems, and issues being addressed by states in the reimbursement program. Approaches taken by the states to resolve what they find to be most troublesome aspects of the rules will also be discussed.

Background

State reimbursement of nonrecurring adoption costs replaces a prior deduction from federal income tax of up to $1,500. That deduction, repealed as part of the Tax Reform Act of 1986, was available to families which adopted a child with special needs. In place of the deduction, Congress amended Title IV-E of the Social Security Act to require states to set-up a program to "make payments of nonrecurring adoption expenses incurred by or on behalf of such parents in connection with the adoption of such child, directly through the State agency or through another public or nonprofit private agency...." (Section 473(a)(B)(i) of the Social Security Act).

Under the new policy, states may reimburse a family for one-time-only adoption costs. The federal government will pay states half (50%) of the cost for amounts not in excess of $2,000 expended per adoption. States may set a lower or higher ceiling for the reimbursement. The federal contribution, however, is only available for reimbursements of no more than $2,000. States must be prepared to document and explain the rationale for setting the ceiling on reimbursements at a rate lower than the $2,000 federal cap.

A clear advantage of the reimbursement scheme over a deduction is the access it gives to taxpayers who do not itemize. It is through itemization for federal tax purposes that deductions from income may be used to reduce tax burden. An additional benefit according to the supplementary information to the proposed rules, is to be realized by transferring control of this assistance for families which adopt children with special needs to state agencies. Thus, the experience of states in adoption assistance would be extended to include nonrecurring costs of such adoptions. However, although states have been trying to develop a fair and equitable program to meet the Congressional mandate, they have found the new policy a difficult one to implement.

Adoptions Eligible for Reimbursement

Reimbursement for expenses is available only in connection with special needs adoptions. The rules specify that for a child to be considered one with special needs, all of the requirements of section 473(c) of the Social Security Act must be satisfied. According to that section, a child may be determined to have special needs if:

(1) the state has determined that the child cannot or should not be returned to the home of his parents; and

(2) the state had first determined (A) that there exists with respect to the child a specific factor or condition (such as his ethnic background, age or membership in a minority or sibling group, or the presence of factors such as medical conditions or physical, mental, or emotional handicaps) because of which it is reasonable to conclude that such child cannot be placed with adoptive parents without providing adoption assistance under this section or medical assistance under Title XIX, and (B) that, except where it would be against the best interests of the child because of such factors as the existence of significant emotional ties with prospective adoptive parents while in the care of such agents as a foster child a reasonable, but unsuccessful, effort has been made to place the child with appropriate adoptive parents without providing adoption assistance under this section or medical assistance under Title XIX.

State administrators agree that on surface, the above quoted criteria appear straightforward and are not a departure from the standards which they must employ as a routine matter under the current adoption assistance program. Moreover, the focus is the child and not the circumstances of the parents. The difficulty is based on applying the section to children with whom the state has not had a prior legal relationship, e.g., private agency adoption, independent adoption, and intercountry adoption.

As made clear in a recent "Policy Interpretation Question" released by the Children's Bureau (ACYF-PIQ-89-02, 5/23/89), each of the eligibility factors in section 473(c) must be satisfied. For the purpose of this Issue Brief, the factors which appear to create the most confusion are discussed below.

Some administrators express concern that it would be necessary to assess the decisions and conclusions of agencies and courts beyond their control, influence or jurisdiction. The issue being grappled with is how to interpret available information on an adoption and from that, make a determination that the placement did or did not satisfy the rules. Further, states are sensitive to the need to base decisions on objective standards that would yield equitable results concerning adopted children of seemingly similar circumstances. Relying on a strict reading of section 473(c), without gloss, is the approach Compact states are advocating to eliminate the potential for confusion in this area. In most cases, the expense incurred for adoptions through private agencies, intercountry adoptions, and independent adoptions would not qualify for reimbursement.

The "assistance" an unembellished reading of section 473(c)(2)(A) would require as a prerequisite to a special needs adoption would rarely be present in intercountry and independent adoptions. The nature of the assistance the statute and regulation appear to anticipate would be of a kind necessary to facilitate the intention to adopt a particular child and ensure the permanency of the placement, e.g., medical care, regular financial payments, or (as made clear by the PIQ) reimbursement for nonrecurring costs. Parents who adopt without benefit of assistance, therefore, might be viewed as not needing such help. Hence, such adoptions would not meet the test to qualify for reimbursement of nonrecurring costs.

The last of the eligibility indicators of section 473(c) has made for some application difficulties. Once again, the problem centers on children whose adoptions are not managed by the state agency. Under 473(c)(2)(b), the state must find factors such as emotional ties to the prospective parents that, in the best interest of the child, rules out a search for parents who would not need assistance; and lacking such ties a reasonable but unsuccessful effort was made to place the child without assistance. To validate assertions of emotional ties, states would demand the existence of a clearly established foster care situation. And, in the case of the foreign born child, evidence of the emotional tie would be in the existence of bonding between prospective parents and child prior to the child's arrival in this country. Proof of unsuccessful efforts to place without assistance would include listing the child with an adoption exchange for some minimum period of time.

Amount of Reimbursement

The regulation gives states the option of establishing a reimbursement amount of up to $2,000. However, the amount of the ceiling varies from one state to another. For example, the following Compact states have set the indicated ceiling on covered expenses:

Arkansas -- $1,500

Georgia -- $ 700

Minnesota -- $2,000

Nevada -- $ 250 (legal fees only; other assistance may be received through other state funding sources)

Wisconsin -- $2,000

Decisions on the maximum reimbursement appear to depend on available state financial resources and the likelihood that necessary expenses may be covered through other sources.

It is interesting to note the different descriptions and explanations used in state policy material concerning the type and nature of one-time costs that may be reimbursed. For example, Georgia specifically notes that reimbursement may be claimed for attorney fees and court costs and "additional expense beyond those services." Minnesota policy goes a little farther by listing covered expenditures other than attorney and court costs, e.g., replacement birth certificate fee, transportation, food and lodging. Other states merely indicate the amount available for the overall purpose of reimbursing parents for nonrecurring expenses. States also differ on whether the claims are to be submitted after incurring all out-of-pocket expenses or as the service is provided and billed.

According to the new rules, a ceiling of less than $2,000 must be justified. A new paragraph, 1365.1(f)(2), specifies that a reasonable lower rate may be set, if appropriate, given state and local practices. In taking such action, the state must document its reasons and allow for public inspection.

As noted earlier, the ceilings established on reimbursement rates have more to do with limited state dollars for such purposes than with the range of one-time expenses prospective adoptive parents may incur. In the area of attorney fees and court costs, states have ample experience and information and are very likely on target. But, it is not clear whether other estimates of costs are equally on point. Early in the process, some states contemplated setting maximum levels for various expense categories, e.g., travel. This idea was generally dismissed as potentially too restrictive and inflexible. The Children's Bureau, in response to questions on this point, has made it clear that states may not set individual limits on expenses. Adoptive parents must be "reimbursed for any (emphasis added) of the nonrecurring adoption expenses described in the final rule when they adopt a child with special needs as set forth in section 473 (c)." (ACYF-PIQ-89-02).

According to the new rules, the state that enters into a Title IV-E adoption assistance agreement with adoptive parents will be responsible for the nonrecurring costs. As a result, the adoptive parents living in state "A" but adopting a child from state "B" would claim expenses under the state "B" program. The amount which may be reimbursed could be more or less than that provided by state "A". Assuming the one-time costs of interstate adoption are no less onerous than those incurred by residents of state "B" who adopt a child in that state, the rate would be fair and equitable.

In instances of interstate adoption which are not the subject of an adoption assistance agreement, the state in which finalization occurs would be responsible for the reimbursement. Using the example above, if the adoption of the child from state "B" is finalized in state "A", the reimbursement rate is that of state "A".

Adequate Notice

State agencies are required to notify public and private adoption agencies, and the appropriate courts of the reimbursement program. Adoption agencies in turn are responsible for alerting the adoptive parents of special needs children of the reimbursement policy. The notice requirement will become a matter of routine for adoptions finalized after June 14, 1989. Agreement between the family and the agency will be a prerequisite in order to make claims under the program. It is the intention of many states to make the prospective parents aware of the assistance source as part of the preparation and planning for the adoption. In addition, many would include notice of the rights and responsibilities for reimbursement as a feature of any pre-finalization court proceedings.

The need for speedy notice of the new program is especially important for those adoptions finalized between January 1, 1986 and June 14, 1989. This is so, because each day that passes increases the likelihood that documentation of expenses may be lost. The adoptive families that fall within this time period under the new rules have two years to submit a proper claim. However, such a grace period for seeking reimbursement and coming to agreement with the state on the propriety of their claim would have scant meaning, if notice is late and receipts and bills cannot be found. This problem may have been avoided at least in part by mention of the new policy in the federal income tax instructions. The fact the deduction was no longer available was noted but no other information was provided.

Related Issues and Concerns

An increased administrative burden due to the reimbursement program is a concern of a number of administrators. Staff resources are already strained in the adoption services units of most states. The job of sorting, monitoring and evaluating reimbursement claims can be expected to be especially felt in states with an active private adoption agency system.

Despite safeguards to prevent unduly subjective decision-making as to which adoptions would be entitled to payment of expenses, misunderstanding and disputes are likely. Consequently, a system to review denied claims will be essential. And, clear written guidelines on what is reimbursable that are readily understood by the adoptive parents before making an application for the assistance are needed. In any event, workers should be prepared to perform case-by-case review based upon the circumstances of each adoption and resulting claims.

The pace of implementation is neither steady nor consistent among states. Many states are still in the process of analyzing the rule from legal and administrative perspectives. This is the case even in states which have no need to enact legislation in order to implement the program. For whatever the reasons for the delay in implementation, this is a state responsibility which is not likely to be lifted. Legislative proposals directed at such costs would not eliminate the current policy.

President Bush has indicated a desire to restore the tax deduction for nonrecurring costs. In fact, he would raise the allowable deduction to $3,000 from its former $1,500 base. However, the President's scheme would only "complement" the state reimbursement program. Hence, taxpayers would be able to claim up to $3,000 tax deduction for one-time expenses related to special needs adoption which were not otherwise covered by their states. For example, if total expenses of $3,000 are claimed by adoptive parents in Arkansas -- after the reimbursement of $1,500 for legal fees and other expenses, the parents would be eligible for a $1,500 reduction in their tax burden. The President's proposal would in essence fill any gaps in state coverage of nonrecurring costs for special needs adoption.

To assist families who adopt children with or without special needs, Sen. Orrin Hatch (R-UT) introduced legislation on March 1, 1989. The bill, Fairness to Adopting Families Act (S. 479), would permit:

(1) a deduction of up to $5,000 from income for adoption related expenses; and

(2) an exclusion from the gross income of an employee of up to $5,000 for employer adoption assistance contributions.

In order to make the above noted changes, the bill would amend the Internal Revenue Code. A nearly identical bill (H.R. 1205) was introduced the same day by Rep. William Lehman (D-FL). The only substantive difference between the two bills pertains to intercountry adoptions, i.e., a $7,000 limit on the deduction for expense and the gross income exclusion in H.R. 1205. The remainder of the bills, including the $5,000 limitation or cap on the deduction and the income exclusion for children born in the United States is the same in both bills.

There are two significant differences between the President's proposal and that of Sen. Hatch. First, the President would offer a deduction only in the case of special needs adoption. Sen. Hatch seeks to provide a deduction and gross income exclusion for the adoption of all children (except those of a spouse) whether or not classified as having special needs. Second, the Hatch proposal would give adoptive families the option of either relying on the proposed deduction or the state reimbursement program. Thus, unlike the Bush proposal, a family could not use the S. 479 deduction to make up the difference between actual costs and the amount allowed under the state ceiling for reimbursement. S.479 would be effective for adoptions which are finalized after December 31, 1988.

A brief summary of the provisions of S.479 is provided below:

The bill would impose a $5,000 cap on the proposed new deduction for "qualified" expenses. Sen. Hatch intends this to be a cap that could be subject to adjustment as the federal budget may demand;

Qualified expenses are those related directly to a legal adoption which are reasonable and necessary. The bill would cover items such as attorney and court costs, agency fees and travel outside the United States. A legal adoption is one not in violation of applicable federal, state and local law;

Individuals earning less than $60,000 a year would be eligible for the full amount of the deduction or the exclusion; for those earning more than $60,000, the deduction or the exclusion is reduced, and as the income level increases, is gradually phased out;

The bill defines child to include one described in Section 473 (c)(1) and (2) of the Social Security Act, i.e., any child with special needs; and the intent is to cover those such as the foreign born who would not meet the requirements of the section; and

Employer adoption assistance programs are subject to special incentive provisions. The employer would be able to treat contributions to the adoption efforts of employees as necessary business expenses and thus, deductible for income tax purposes. For the employee, the assistance from the employer up to a $5,000 limit would be an income exclusion. However, the caps on the deduction and the income exclusion may not be used independently, i.e., a $10,000 write off of the adoption expenses would not be permitted. To the extent the $5,000 cap on the deduction is not exhausted, the remainder or excess would be applied to the employer's contribution and excluded from income.

To date, 13 Senators have signed on as co-sponsors for S.479. In the House, the Lehman bill has attracted 38 co-sponsors. It should be noted that the support for both bills is bipartisan.

ISSUE BRIEF VII
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