New baby on the way? Help employees use pre-tax funds to save
The cost of having a baby can be daunting, even with insurance.
The cost of having a baby can be daunting, even with insurance. The average family spends around $5,000 on their health care needs for labor and delivery. And, that doesn’t include any post-natal expenses or the actual costs that come when the child arrives.
But employers can help employees set up practical financial steps to offset the incremental costs that come with a new addition.
Employee benefits can help new parents with out-of-pocket costs. The most direct way is through health insurance. According to data collected by FAIR Health, the average price of having a baby vaginally is $5,000 to $11,000 and c-section $7,5000 to $14,000 without insurance. However, these amounts don’t account for the risk of complications, extended stays or even regional variations. Health insurance can help to reduce out-of-pocket costs and overall risk if complications should arise.
Related: More employers offering fertility, family planning benefits
However, insurance alone is not enough. Many new parents need a guide to show them the tools available so they aren’t burdened while trying to welcome their newest family member into this world. Encourage employees to consider using pre-tax funds to save for their out-of-pocket expenses. This includes setting up a Flexible Spending Account (FSA) or Health Savings Account (HSA). These accounts allow employees to set aside pre-tax dollars to pay for qualifying expenses.
For example, an employee can make elections for a Health FSA and a Dependent Care FSA. The Health FSA can be used to pay for co-pays, co-insurance and other qualifying medical expenses. The Dependent Care FSA is used for the cost of child care services. HSAs can be used to pay for out-of-pocket medical expenses, including dental and vision care. All three accounts offer tax savings. For example, if an employee contributes $200 per month to a pre-tax account, they could save up to $80/month or $960 annually in taxes. The limits for each account will vary by year and potentially employer.
Planning ahead
Whether employees are preparing for a new baby or thinking ahead for the future, here are four manageable steps that can be taken to put money aside:
1. Employees could switch to a high-deductible health plan (HDHP). This allows soon-to-be parents to save on monthly premiums while putting tax-free money aside in their HSAs. Since the first year is likely to come with larger expenses, recommend they are funding the HSA to at least cover the cost of the deductible.
2. Employees should start early and hit their savings goal every year. The IRS announced the 2022 HSA contribution limits, which are $3,650 for an individual and $7,300 for a family. If an HSA is maxed out for the five years leading up to childbirth, they could have more than $36,500 under family coverage levels. If employees have opted for a Health FSA, make sure they have maximized their annual election. As an additional bonus, the full election of the Health FSAs is available on the first day of the plan year making it easier to pay for expenses incurred early in the year.
3. Employees may consider investing their HSA funds. It is possible to invest HSA dollars for even greater potential account growth. This can be a strategy to save more money for when it is time to have a child. As a bonus, all of the gains will come out pre-tax. Remember, investing comes with risk so it is a good best practice to keep the higher of either one-year’s anticipated expenses or the deductible amount in a secure investment or FDIC-insured account.
4. Review helpful options for employee family planning. Offer additional assistance to help employees with their family planning. See if your state requires assistance with infertility coverage, or share your state’s adoption and guardianship assistance.
In the first 30 days
- Employees should add the child to their insurance policy. Most insurance plans give a certain period (often 30 days) to add a baby onto a plan. Be sure to communicate the expectations early so that parents can plan and avoid the hassle of denied claims for new baby’s medical expenses.
- Set up a plan with employees to revisit their insurance plan. Having a child qualifies for special enrollment, so employees should take advantage of this change. If their current plan does not fit the needs of their growing family, then the policyholder can change plans to one that is better suited to cover their family’s needs. Additionally, premiums usually go up with a child, so it would be worth looking into an HSA-qualified plan (or increasing contribution levels to an HSA if you already have one).
In the first year
- Encourage employees to use their Health FSA or HSA funds. FSA and HSA dollars can be used for certain baby care supplies such as thermometers, band-aids, pain and gas relief, diaper ointment, breast pumps, sunscreen, first aid kits and more.
- Revisit savings goals with the newest addition in mind. A new baby means increased costs, but this shouldn’t prevent employees from saving for the future. Share how to utilize their HSA and save what is possible because children often bring the unexpected.
As the family grows
- Prepare finances for the entire family. Raising a child for 18 years can cost upwards of $250,000. Share the benefits in planning ahead for the increase in costs to help ease the burden on employees’ household budgets.
- Communicate the benefits of a Dependent Care FSA. DCFSA’s are a great way for employees to receive childcare and save money once they go back to work. These accounts allow employees to set aside pre-tax funds for eligible dependent services, such as preschool, summer day camp, and before or after school programs in addition to child/adult daycare.
- Employees need to invest in the future. If an employee doesn’t have an HSA, it’s worth the time to look into one. Not only does it save employees money each month, but the pre-tax money saved can be invested and grow so that there’s even more for the future. While an HSA should not replace a 401(k) plan, it can be used to augment retirement funds when the time comes.
In the end, to best support employees growing families, it can help keep some simple concepts in mind:
- Listen to their needs.
- Help them set goals.
- Encourage them to look ahead to the future.
With discipline and planning, employees will have more money to support a growing family.
Becky Seefeldt is vice president of strategy at Benefit Resource LLC (BRI), a leading provider of dedicated pre-tax account administration and COBRA services nationwide.
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