Introduction

In the December 14, 1988 Federal Register, the Department of Health and Human Services published the final rule to implement state reimbursement of nonrecurring expenses in the adoption of special needs children. The rule was promulgated to implement a change to Title IV-E of the Social Security Act made by the Tax Reform Act of 1986.

The final rule provides for payment by the federal government of a 50 percent matching share of nonrecurring adoption expenses reimbursed by states through their federally aided and state funded adoption assistance programs. Federal contribution to such costs as families adopting special needs children is not new. The Tax Reform Act of 1986 repealed a provision of the Internal Revenue Code under which adoptive parent(s) could take up to $1,500 of such nonrecurring expenses as a deduction on their federal income tax. The new federal program replaces this previously allowed deduction with an entirely new method of providing the aid.

Benefits

An adoption is accompanied by some unique costs. These are one-time (nonrecurring) costs that are incidental to the process of consummating the legal parent-child relationship through adoption. The regulation identifies court costs, adoption fees, attorney fees and "other" expenses. It is left to the state to determine the nature or type of "other" expenses that would be appropriate for reimbursement. However, the language is clear that the preliminary test is whether a direct relation exists between the claimed cost and the formal adoption process. The regulation gives as examples such items as the cost of the home study of the prospective adoptive parents and transportation expenses in connection with the attendance at the adoption proceeding.

The maximum federal contribution is $2,000. If the payment is on account of the adoption of siblings, the adoption of each child is deemed a separate case for which a maximum of $2,000 may be paid. However, a state may establish a cap on the allowable reimbursement of more or less than the federal limit, provided that it is reasonable and based on prevailing and customary costs for the included items in the state or region.

In the great majority of instances, the amounts which adoptive parents are likely to receive should be greater than the value of the income tax deduction allowed under the Internal Revenue Code. Unless the state sets a lower maximum figure, the $2,000 allowance under the 1986 law is more than the $1,500 maximum deduction. Even more important is the form of the benefit. The $2,000 (or such lesser amount as a state may set) is a reimbursement. Thus, the parents will receive the entire amount of their expenses, up to the allowed limit. A deduction merely lessens the total amount of taxable income. Consequently, the previous benefit was only a maximum of $1,500 multiplied by the percentage of the tax rate applicable to the particular taxpayer.

The financial impact of these benefits on the federal and state governments also differs. Under the previous tax deduction method, the federal government lost the amount of the federal income tax on the $1,500 or such lesser amount as may have been claimed in a particular instance. Under the "Tax Conformity" system used for the filing of state income tax returns, the state lost the amount claimed under the deduction multiplied by the state tax rate applicable to the particular taxpayer. This was true unless the state specifically excluded adoption expenses as a deductible item or treated them in some other way that did not conform to the federal Internal Revenue Code. Under the 1986 Tax Reform Act and the implementing rules discussed here, nonrecurring expenses are treated as administrative costs for Title IV-E of the Social Security Act. Thus, the state will pay the amount of the reimbursement to the parents and receive 50 percent of these costs from the federal government. Administrative costs associated with the reimbursement program would also be matched by federal dollars.

Eligibility

Nonrecurring adoption expenses are to be paid as reimbursements to adoptive parents. However, eligibility is based on the child's situation and not on that of the parents. The income and resources of the adoptive parents are not relevant. The child resources of the adoptive parents are not relevant. The child must be one who meets the definition of a "child with special needs" under the Social Security Act. Consequently, the child for whose adoption expenses the adoptive parents claim reimbursement must be one with respect to whom the state has determined that the child would not be reasonably adopted without subsidy. The regulation provides that a child in a federal or state adoption assistance program is eligible. it follows that if the state includes reimbursement for the federally allowed items of nonrecurring adoption expense in its state adoption program, the state can claim federal contribution for children who receive state adoption subsidies but who are not eligible for Title IV-E Adoption Assistance as well as for Title IV-E children.

The proposed rule would have required states to make a determination that the child meet the statutory criteria for one with special needs found in Section 473(c) of the Social Security Act. However, the criteria to be met under section 473(c) did not include (c)(2)(B) of that section. The final rule eliminates the exception to 473(c)(2)(B). Thus, the threshold determination of eligibility for reimbursement of expenses is compliance with the terms of 473(c), including (2)(B) of that section which mandates a showing of reasonable but unsuccessful efforts to place the child without assistance. The conditions of (c)(2)(B) are in addition to (c)(1)- the child cannot be returned to its parents, and (c)(2)(A)--a special factor or condition exists that precludes adoption without assistance.

The proposed rule would have given states the option to reimburse adopting parents for their nonrecurring expenses for intercounty adoptions. Under the final rule states are required to pay for allowable one-time costs in intercountry adoptions. However, reimbursement is only available for those children who meet the special needs criteria of section 473(c) discussed above.

Time Periods for Eligibility and Compliance

In general, an adoptive family has two years within which to file its claim for reimbursement of nonrecurring expenses. However, during the initial period of the new reimbursement program, it is important to remember that this new method of aiding parents with subsidized adoptive children takes the place of the earlier Internal Revenue Code deduction. Since the 1986 tax year was the last one for which the adoption expense deduction could be claimed, special provision is made for claims that could have been filed from January 1, 1987 until the reimbursement program actually becomes operative. Claims can be filed for nonrecurring expenses incurred after January 1, 1987 and up to six months after the effective date of the regulation, i.e., up to May 15, 1989. Reimbursement will also be paid for nonrecurring adoption expenses incurred prior to January 1, 1987, if the expenses were not paid until after January 1, 1987.

State are given up to two general sessions of their legislatures to enact any legislation necessary for participation in the federal program for reimbursement of nonrecurring adoption expenses. In most instances, this will mean until some time in 1991. In the few state which do not hold general sessions annually, the period will be even longer. However, it is also required that the state reimbursement program provide retroactive eligibility back to the time provided in the regulation, i.e.,claims for reimbursement which accrued or which would have accrued on or after January 1, 1987.

It should also be noted that in order to be eligible for reimbursement, the allowed adoption expenses and their maximum amounts must be stated in an agreement between the state and the adoptive parent(s). This may be either part of the Adoption Assistance or State Adoption Subsidy Agreement, or it may be a separate agreement that simply concerns the payment of the nonrecurring adoption expenses. In any event, the agreement must be entered into prior to the final decree of adoption.

Intrastate and Interstate Cases

Eligibility includes both parents of adoption assistance children placed within the state and those placed on an interstate basis. In either type of case, the child must be covered by an Adoption Assistance Agreement which meets the content requirements of Section 475(3) of P.L. 96-272, the 1980 Adoption Assistance and Child Welfare Act. However, regardless of the residence of the adoptive parents, the state which enters into the Adoption Assistance Agreement is the one responsible for reimbursement of the nonrecurring adoption expenses.

Placements and Adoptions Must Accord with State Law

Section 1356.41(d) of the regulation reads in part:

For purposes of payment of nonrecurring expenses of adoption, the State must determine that the child is a "child with special needs" as defined in Section 473(c) of the Act and that the child has been placed for adoption in accordance with applicable state and local laws;..." (emphasis added)

Administrators of various child welfare programs have from time to time been perplexed by situations in which benefits or services are requested on behalf of children illegally brought or sent into the state by their families or caretakers. The question is whether it is permissible, mandatory or even lawful to provide benefits in such situations. While the provisions of this regulation cannot fix an overall answer to the question, it does make clear that children whose preadoptive placement was not in accordance with laws such as the Interstate Compact on the Placement of Children are not eligible to have the nonrecurring expenses of adopting them reimbursed under the federally aided program of a state.

ISSUE BRIEF V

© January 1989