States' Experience in the Reimbursement of Nonrecurring Adoption Costs

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The Secretariat, at the request of member states, monitors implementation of state reimbursement of nonrecurring costs in the adoption of children with special needs. Different state interpretations of the program regulations (45 CFR 1356) result in dissimilar outcomes for the various applicants. Maximum reimbursement rates vary as would be expected given (see Attachment A) the variations in costs for the wide array of expenses that may be incurred in the adoption process. However, the rates also differ due to the nature of each state's adoption program. For example, issuance of a new or revised birth certificate is a cost in some states but not others.

The awareness or suspicion of significant variety in implementation strategy and outcomes among the states has been, for some administrators, a cause of unease. In part this can be attributed to limited experience with the program. Another explanation is the fear that the underlying differences between states may, at some point, be cited as instances of noncompliance with the federal mandate that was the predicate for implementation of this scheme.

This Issue Brief will discuss certain implementation decisions and experiences among the states. The intent here is to shed light on the reimbursement program in operation (or ready for operation ) under a number of different interpretations. In particular, this paper will address the following topics that are most often identified as being troublesome, i.e., eligibility of the private agency and foreign born adoptee, and administrative burden and cost for the state.


State reimbursement of nonrecurring adoption costs replaced a federal income tax deduction. That deduction, of up to $1,500, repealed as part of the Tax Reform Act of 1986, was available to families who adopted children with special needs.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 children, directly through the State Agency or through another public or nonprofit private agency...." (sec. 473(a)(1)(B) of the Social Security Act). This is a federal mandate. States must implement this program. The fact that a state's adoption assistance program may be exemplary does not excuse it from this requirement.

Under the new policy, states reimburse adoptive families for certain one-time-only adoption costs (e.g., attorney fees, travel, and health examination). The federal government will match one-half (50%) of the costs 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 not 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.

The rule became effective upon publication -- December 14, 1988. For states that require legislative action in order to proceed, the end of the second general session after the December effective date marks the deadline. According to our telephone survey, 35 states have implemented the program (see Attachment A). However, questions and concerns remain about aspects of the reimbursement scheme even among those administrators who put the program in place prior to or closely following publication of the final rule. And, as a purely policy matter, it is useful to sample state experiences to date in order to assess the effectiveness of the program.


Under prior law, taxpayers who itemized were able to deduct the nonrecurring expenses associated with the adoption of children with special needs. The appropriateness or legitimacy of such claims were evaluated by the Internal Revenue Services (IRS) in accordance with its rules and procedures. However, the IRS was aided in its assessment by the determination of Title IV-E eligibility made by a state. Current law differs from the former in two important ways. First, actual hands-on evaluation of adoptions to qualify for government assistance now rests with the states. Equally significant, eligibility for Title IV-E adoption assistance is not a prerequisite. Thus, applications for reimbursement of nonrecurring costs must be accepted and evaluated for independent adoptees and those placed by private, adoption agencies whether the children are native or foreign born. (45 CFR 1356.41(d)).

As a practical matter it would appear logical that adoption specialists assess claims for reimbursement for all children said to have special needs. However, there is now some experience that shows problems can arise when the children concerned are non-agency involved, i.e., the state agency had no involvement or knowledge of the particular children and their adoption circumstances. Furthermore, this is a source of inconsistency among the states. The claim approved in one state may be denied in other. Given the criteria to be applied, this is unavoidable.

The rules specify that children with special needs must meet all requirements of section 473(c) of Title IV-E of the Social Security Act. According to that section, special needs exists 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.

The state must apply each of the above quoted factors (including state-specific criteria) to all children claiming special needs, including those with whom the state has not had a prior legal relationship. To do this, it is necessary to assess the decisions and conclusions of agencies and courts beyond their control, influence or jurisdiction. How a state interprets the factors controls eligibility. In the case of non-agency involved placements, i.e., private agency and the foreign born or intercountry adoptee, the results are somewhat unpredictable and depend on the state.

Private Agency Placement:

States report that applications from parents who adopted through private agencies have not been substantial. For some of these states, it is assumed that the children placed by such entities, are so clearly not of special needs (e.g., healthy infants) that attempts are not being made to qualify for reimbursement. More involved reasons for the small number of applications representing special needs placements also are offered.

In preparation for implementation, a number of states reviewed their special needs criteria. As a result, some determined that policies concerning factors that make children hard to place without assistance (sec. 473(c)(2)(A)) should be revised. The general effect has been to tighten state standards in this regard. For example, membership in a minority group would no longer constitute evidence of special needs, e.g., healthy black infants would not be categorized as children with special needs. Another example concerns clarification of activities that indicate efforts to place without assistance (sec. 473(c)(2)(B)), e.g., photo listing plus presentation at a state's exchange meetings. Stricter standards have positive significance in the sense that "special needs" more accurately reflect reality and hence efforts are more clearly targeted to the children of greater need. Conversely, it means that some children who may in fact be hard to place fall outside the program parameters. A further unintended result according to some administrators is to discourage private agency attempts to place such children. Agencies may feel unable to adequately develop a case that would satisfy the special needs criteria. Moreover, the agency may be reluctant to place itself in the middle of a dispute between the state bureaucracy and adoptive parents concerning costs that are reimbursable or whether the adoption satisfied section 473(c). In any event, there has not been a major surge of applications from parents of children adopted through a private agency. A simple but difficult-to-confirm reason for this is that private agencies very seldom are involved in the adoption of children with special needs. This program of reimbursement for one-time only adoption costs is not likely to appreciably alter that situation.

Foreign Born or Intercountry Adoption

As in the case of private agency placements of the native-born, federal law does not exclude the foreign born adoptee from the reimbursement program. Under the proposed rules, state reimbursement of adoption costs for the foreign born would have been an option. The final rules do not give states a choice in this matter. The eligibility of the foreign born or intercountry adoption for the program depends upon satisfying the criteria of section 473(c) of the Act.

Initially some administrators were concerned that this type of adoption would be very costly to states given the significant numbers of the foreign born adopted by United States citizens in their jurisdictions. Federal officials, however, did not expect this group to figure prominently among those who satisfy the requirements for reimbursement. In practice, the number of foreign born adoptees who satisfy section 473(c) are neither as large as feared by the states, nor as negligible as expected by some federal officials. Moreover, the states that anticipated many applications from this category have in fact had few, and have approved even fewer. Meanwhile, among states that had not contemplated problems in this area, somewhat more assistance has been found appropriate.

The three most commonly cited reasons for denial of assistance to the adoptive parents of the foreign born are:

1) Failure or inability to provide adequate documentation of sufficient efforts to find adoptive parents(s) without assistance,

2) Entry into the United States for the purpose of adoption by identified individuals is seen as evidence that assistance would not be (or was not) necessary; and/or

3) State is not able to determine that children could not or should not be returned to their home or country of origin because the state was not involved in the termination of parental rights.

Federal officials concede that program regulations permit a certain degree of flexibility for states to stress or de-emphasize certain elements that would constitute special needs. Such flexibility makes it virtually impossible to predict how any single set of circumstances is likely to be viewed from state to state.

As stated in the preamble to the final rules, there is no statutory basis for presumptively excluding the foreign-born adoption from the program. Hence, states that would argue lack of statutory support for including these adoptees under the eligible category must reexamine their conclusion. Perhaps the most persuasive grounds for finding ineligibility here (the same holds true for most native-born adoptees placed by private agencies) concerns the willingness to adopt without assistance. Central to that finding are the steps taken to place children or to adopt children without government assistance. The following are extracts from narratives concerning "reasonable, but unsuccessful effort to place without assistance." In the first two cases, A and B, the intercountry adoption qualified for reimbursement:

A. Naree was kept in an orphanage in India for a year while an effort was made to find a family for him there. When no family in India could be found, efforts were made to find a family for him through ... an adoption agency in the United States ... and his photo was placed in their listing sheet and sent to agencies and families around the United States. The Smith family was the only one that expressed a willingness to adopt Naree.

B. An effort was made to find a family for the children in South Korea, but no family was available. The agency in South Korea responsible for the children then looked for a family from the American, European and Australian couples who had applications in Korea to adopt children. If a family had been available from one of these other countries there would have been no need to look for an American family, and no need for adoption assistance from the United States government. No such family from another country was available.

The opposite result was obtained under somewhat similar circumstances in the third case.

C. Jose was classified "hard-to-place" in adoption due to his age, sex, lack of concentration in school, and impulsive behavior. The Brazilian Court of Minors was unable to identify a Brazilian family disposed to adopt Jose and thus contacted the Brazilian child advocacy organization, for assistance in identifying a foreign family for adoption. distributes information to U.S. adoption agencies and families about the children with special needs awaiting adoptive homes. prepared a home-study, approved the placement of Jose with the Smiths, and is currently providing post-placement services to the family.

In A, B, and C the narratives indicate a search was conducted to find adoptive parents in the homeland of the children and, as a last resort, the United States. The degree to which the availability of assistance was necessary in order to facilitate the placement in A and B as opposed to C is a matter of interpretation. If the efforts are deemed inadequate, one way to view the reimbursement costs associated with A and B is as a retrospective activity.

Some administrators have indicated "retrospective" application of the program of reimbursement for nonrecurring foreign born adoptions made some adoptions eligible that would not receive such treatment in the future. The reasoning here is that since the program did not exist at the time of adoption activities, applicant families could not have complied with the full letter of the rules. However, as long as the spirit of the requirements is met there is no basis for disallowing their claim. Adoptions that occur after the implementation phase of the program require a signed assistance agreement between the state and the family prior to finalization. It is anticipated that only rarely would assistance be vital in order to proceed with a plan to bring children into the country for the purpose of adoption.

Operation of the Program

State adoption assistance programs are geared toward the recruitment and preparation of individuals to become adoptive parents of children who have special needs and who are free for adoption. A corollary to that objective is to identify and make available the necessary assistance and resources to facilitate and sustain such adoptive placements. The reimbursement of adoption costs appears to be complementary to the basic adoption program purpose. Reimbursable expenses are those directly related to the adoption of children (45 CFR 1356.41(i)).

Implementation of this requirement for payment of nonrecurring costs has not been overly burdensome for a number of states. After the initial review of policy and development of an implementation strategy, it becomes for some administrators merely one more job responsibility. Increased administrative burden is generally associated with a significant number of non-agency involved adoptions.

As suggested in the preceding section of this paper, the reimbursement program operates on two levels of difficulty. First, state agency involved adoptions (Title IV-E or non-Title IV-E subsidy) are generally handled with comparative ease. Here, the adoption specialist and the (prospective) adoptive parents(s) have a relationship that, it is hoped, has prepared them to work in conjunction for the benefit of the children. In the course of working out the Title IV-E agreement or the state subsidy, nonrecurring cost items are necessarily addressed. Consequently, it is less problematic to help the parents know that documentation of costs (receipts, etc.) will be required and to identify the allowable expenditures. Moreover, the difficult task of deciding whether the children in question are in the category of special needs already has been resolved long before any question of adoption related costs arises. At this level of difficulty, the specialist's task becomes nearly clerical in nature, i.e., certifying the items or services claimed for reimbursement and the right to payment.

The second level of difficulty relates to non-agency involved adoptions. Administrative burden here depends on a number of factors including the extent to which the state agency adjusted or refined its policies to preclude review of applications from clearly ineligible adoptions. Furthermore, there is no prior relationship or common understanding. The eligibility criteria and nature of allowable expenses must be explained. The most frequent complaint from administrators concerns inadequate documentation to support these claims, i.e., proving compliance with section 473(c) and documenting expenditures. Until private agencies gain experience in this area, state agency specialists will be required to devote disproportionately more time to applicants from this source than others.

The application form can be an important information source. If designed as an administrative aid, the application can serve to force applicants to self-screen for eligibility. The application for reimbursement used by the Minnesota Department of Human Services is an example of the type of screening and information imparting format many states are using (see attachment B). In the event administration of the repayment scheme is not handled centrally, the application form operates as a check for the individual in local offices who would likely handle such claims on an infrequent basis. It supplies objective reasons for granting or denying claims. In addition, the form serves as a source of data for the purpose of tracking the nature and circumstances surrounding special needs adoptions in the state.

As noted earlier most states have not found this program to result in excessive administrative burden. Some administrators, however, contend the administrative burden to the states is much less than should be experienced. This view relates to the non-agency involved adoptions. A reason advanced for this is that most people remain unaware of the availability of reimbursement for adoption costs because of ineffective publicity or the agency fails to encourage its clients to make use of the program. As a result, few non-agency cases are pressing to be certified as eligible. Another reason for the low number of non-agency involved cases is also due to a perception among adoptive parents that to seek assistance is akin to declaring an inability to parent. Those who adopt through private agencies are, therefore, reluctant to approach human service agencies for help.

Adoption Costs

Nonrecurring adoption costs are those expenditures such as attorney fees, courts costs, and other expenses that are directly related to the adoption of children with special needs (sec. 473(a)(6)(A)). The amount of money that must be spent and the particular activities or services varies according to the state (e.g., no attorney fees in California but a major reimbursement item in Louisiana). The Secretariat surveyed states by telephone to learn the maximum available reimbursement and average payments (see Attachment A). It is worth noting that the $2,000 maximum reimbursement had its start in a survey of 120 private agencies. The survey results were relied upon by the Department of Health and Human Services (HHS) for adoption cost information. Comments received on the $2,000 as a proposed maximum failed to provide any compelling reasons for change. However, experience to date begs the question of whether the $2,000 ceiling is realistic, and in the alternative, whether states have accurately captured the costs incurred in their jurisdiction. Additional experience is needed in order to answer such queries. The ceiling or maximum reimbursement ranges from $2,000 in 16 states to a low of $250. No state has opted to reimburse adoptive parents above the $2,000 limit on the 50 percent match rate available from the federal government. Only 13 were able to identify the average amount paid for nonrecurring costs -- $698.

Attorney fees are the single most expensive item reported. In many states, the reimbursement represents nothing more than this particular cost --legal representation. Several administrators expressed concern that the rules limit what are "nonrecurring costs" in such a way that certain unavoidable expenditures are not recoverable. The rules restrict "other expenses" (45 CFR 1356.41(i)) to adoption studies, supervision of the placement, and transportation, etc. This definition, some administrators contend, is too limited in that it fails to recognize the need for expenditures such as the large initial purchase of clothing for adopted children; legal fees if the adoptive parents are parties to the termination proceeding; or the cost to pursue a fair hearing for higher subsidy. In response, federal officials would note that the nature of the costs incurred by adoptive parents, costs that are not being covered, are those not directly related to the adoption process. In other words, such activities arguably are not part of the process necessary to adopt the children in question. However, states are free to assist parents in meeting these expenses albeit without federal assistance.

It is too early to accurately assess cost impact. Program cost is ultimately related to state decisions about eligibility. However, an advantage to states, from a cost perspective, is to relieve other accounts of adoption related expenses. This of course assumes the state already was paying for such items out of some fund lacking a federal match.

Alternative to Current Law

Toward the end of 1989, (9/14/89) Sen. Lloyd Bentsen (D-TX) and Sen. Bob Packwood (R-OR) introduced legislation, S.1628, that would restore a federal income tax deduction for the nonrecurring costs of special needs adoption. This proposal, essentially President Bush's initiative, was stripped from the 1989 budget reconciliation bill along with other non-revenue enhancers. Finance Committee staff indicate it would likely be pursued again this year. Under this measure the allowable deduction (also to be available to taxpayers who do not itemize) would be $3,000. However, the scheme would only "complement" the state reimbursement program. Hence, taxpayers would be able to claim $3,000 in tax relief for one-time expenses related to special needs adoption that were not otherwise covered by their states. For example, if total expenses of $4,000 are claimed by adoptive parents in State A -- after the reimbursement of $2,000 under the State A program for legal fees and other expenses, the parents would be eligible for a $2,000 reduction in their tax burden.

Another alternative is the Fairness to Adopting Families Act introduced last year (3/1/89) by Sen. Orrin Hatch (R-UT) in the Senate and by Rep. William Lehman (D-FL) in the House.

The proposal would grant to adoptive parents of children who may or may not be categorized as having special needs:

1) a deduction from income for adoption related expenses; and

2) an exclusion from gross income for employer adoption assistance contributions.

The amount to be deducted or excluded from income would be $5,000. (Rep. Lehman's bill includes a $7,000 ceiling for intercountry adoptions.) The purpose of the legislation does not include repeal of state reimbursement for nonrecurring costs according to the Senator's staff. Presumably, those adoptive parents who do not itemize for federal tax purposes and, hence, would not be able to take advantage of the proposed deduction would receive the benefit of the current reimbursement program for nonrecurring costs. Staff for Sen. Hatch indicate his intention to move this measure forward in 1990.


Experience under the present system is not extensive. However, some conclusions and observations are possible at this time. Many states are making reimbursements for one-time, out-of-pocket costs that arise in the adoption process of children with special needs without excessive difficulty. Nonetheless, most state administrators, if given a choice between current law or a scheme to reduce tax burden, would choose the latter. There are several reasons for this preference.

The differences between the states in the amounts paid out and the services that must be purchased are directly related to the specific state that either entered into the adoption agreement or is the site of finalization. Hence, the reimbursement depends on the state that is most intimately concerned with the adoption. It follows that the degree of financial relief received by adoptive parents depends on the state.

Perhaps the most troublesome aspect of the current reimbursement program concerns non-agency involved adoptions. Qualification for reimbursement is a function of how the state interprets the section 473(c) criteria. One may argue, however, that such judgments reflect the state's right and responsibility to make policy decisions affecting the expenditure of public monies. Moreover, the resulting differences are a function of the statutorily permitted flexibility in state definitions of what constitutes special needs. Section 473(c) provides guidance and direction, but the states determine what age, for example, children may attain and make it "reasonable to conclude" that adoption assistance would be necessary to facilitate adoption placement. Another reason for dissatisfaction is the cost of the program to state and local agencies. The reimbursement of adoption expenses requires the payer agency to incur a cost before claiming federal matching monies. Many state administrators express concern that it will be necessary to ask lawmakers for "up-front" money to cover this new cost item. However, it is difficult to predict the cost for adoptions that are not state agency involved. State agencies cannot say with certainty how many such adoptions occur would be eligible each year. In any event, the overall result is to create another cost that Title IV-E must absorb. The effect could be to suffer funding reduction in some other adoption program activity to help offset the appropriation for nonrecurring reimbursement.

State adoption assistance programs cover a wide array of potential and inevitable costs that otherwise would be the responsibility of the adoptive parents. As a result, many report this program would have the effect of creating artificial cost increases for many services, e.g., attorney and private agency fees. The upshot of the foregoing are larger state costs for special needs adoptions or expenditures that are over and above the maximum reimbursement amount and which the parents may not recover.

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