Your New Baby

Rethinking Your Benefit Elections

The addition of a new family member is an opportunity for you to reevaluate the employer-provided benefit plans, such as health insurance and life and disability insurance, which you and your spouse may be receiving. These important benefits give you flexibility, financial preparation and a foundation for your future.

The arrival of a new baby brings with it a significant increase in your responsibilities. You need to make sure that your benefit elections are suitable for your new situation.

PPOs and HMOs

If your employer offers these options, you may want to consider joining a Preferred Provider Organization or a Health Maintenance Organization.

A Preferred Provider Organization (PPO) is a group of doctors, hospitals, and other health care suppliers that have been carefully selected by a medical insurance carrier and are periodically reviewed to make sure that the care and services they provide are necessary and appropriate in given circumstances. Every time you or your child needs care, you have a choice of using either PPO providers or non-PPO providers. However, when you use the services of a PPO provider, whether it is a hospital or physician, your cost is lower and more services are eligible for coverage.

For example, annual physicals, well-child care and certain preventive tests and screenings may be covered only when you use PPO providers. This can add up. We're not just talking about co-payments or deductibles; we're talking about whether or not the procedure or doctor visit qualifies for coverage at all. Since your new baby can be expected to accumulate several thousand dollars in medical expenses the first two years, you can see how important your planning becomes.

If the services of a specialist are required or a hospital admission is indicated, make sure that the doctor referred or the hospital used is a member of the PPO network; that way, you will receive the higher benefit levels. The responsibility for making sure that all referrals are PPO providers rests with you. Don't be caught off guard by relying on an outdated network directory or the word of a friend. Checking with the doctor or the insurance company when you make your first appointment is a good way of avoiding financial surprises later.

Membership in a Health Maintenance Organization (HMO) may be offered as an option by your health plan. When you join a HMO, all your medical treatment is provided by HMO physicians and facilities. Covered services vary by HMO, but generally, joining an HMO offers these advantages:

  • For each office visit, you pay a small flat fee with no deductible. Your hospital stays are usually covered at 100%. Deductibles and co-payments based on a percentage of the expense incurred do not apply to covered procedures and services.
  • Preventive care is not only covered, it is encouraged. Services such as physicals, immunizations and routine pediatric care may be covered at 100% or for a nominal flat fee.
  • Your paperwork burden is reduced, since there are generally no forms to fill out.

Due to the comprehensive coverage provided, joining an HMO may be right for you. But be careful: Membership is expensive. Before you make the decision to join, make sure you have carefully evaluated the trade-off of your increased premium costs against the added coverage you will be receiving. Carefully review lists of covered services and participating doctors and hospitals.

Adding Your Child to Your Health Policy

It is important to add your baby to your health policy as soon as possible. What happens when both spouses have medical insurance coverage and the baby is added to both policies?

There are two rules that are followed to determine whose policy is primary, the "Birthday Rule" and the "Gender Rule". The Birthday Rule simply states that for parents who are not legally separated or divorced, the plan covering the parent whose birthday falls earlier in the year is the primary coverage for dependent children. Only the month and the day are considered. If the parents have the same birthday, the plan covering the parent for the longer period of time is the primary plan. If the parents are separated or divorced, the plan of the parent who has custody of the child generally provides coverage, unless the divorce decree or court order specifically states otherwise.

The Gender Rule simply stated is that the father's insurance is always primary. If the Birthday Rule applies under one contract, but the Gender Rule applies under the other, generally, the plans defer to the Gender Rule.

Your dental plan and vision and hearing plans also need attention. The birth or adoption of a child may enable you to add, elect or drop medical, dental, and vision/hearing coverage. If you have elected dental and/or vision hearing coverage for the benefit year in which your child is born, you may want to take care of your dental and/or vision exams and any other elective items before the baby arrives. Once the baby arrives, you could drop these coverages, thus saving money in premiums for the remainder of the benefits year. You can always reenroll in the plans during the next annual enrollment period.

Health Care Flexible Spending Accounts (FSA)

These accounts are a convenient, before-tax way to pay for your qualified out-of-pocket health care expenses. Money from each paycheck is deposited into your personal flexible spending account. You submit claims to the account to reimburse yourself for eligible medical expenses. The money you allocate is not subject to federal income tax or Social Security withholding. The amount you can contribute to your account is generally limited annually. If you expect to incur any medical, dental, or vision/hearing expenses during the year that will not be reimbursed by insurance and is payable by you personally, you should consider using this benefit. How does it work?

At the beginning of the plan year, you estimate your medical out-of-pocket expenses for the next year, and elect to put that amount in your FSA. Your contribution is deducted in equal, pre-tax installments from each paycheck.

You submit claims to pay for eligible out-of-pocket expenses related to health care. This includes dependent expenses, such as for your newborn. Tax-free reimbursement for your expense is paid to you out of your account, which you have contributed to on a before-tax basis. Bottom line: You save money—permanently—on taxes.

Every plan has different definitions of what constitutes an "eligible expense." You should refer to your benefits book for a listing of what qualifies and what doesn't. Generally, qualifying expenses are those health care expenses that would be considered tax-deductible as a medical expense deduction by the IRS. Note that over-the-counter (OTC) drugs are not a qualifying expense. For a current, complete listing of all IRS approved medical expense deductions, consult IRS Publication 502.

Should You Open an FSA?

Whether or not you open a Health Care Flexible Spending Account depends on what you expect your out-of-pocket health care expenses to be for the year. Start with your medical deductibles, then add non-covered expenses such as your co-payments, charges over the reasonable and customary standard, and other un-reimbursed expenses. Remember to estimate the additional health care expenses of your new baby, which can be significant. If you do have out-of-pocket expenses, either large or small, you should look into this option.

These accounts are designed to help you save on taxes. Whatever money you contribute to your account reduces your taxable income; for IRS purposes it is as if you never earned the money in the first place. This saves you tax dollars. For example, if you contribute $1,000 to your account and are in the 15% tax bracket, you could save $150 in federal taxes and $76 in FICA/Medicare for a total savings of $226. In addition, certain states follow the federal rules, so that there would also be state tax savings.

CAUTION: You must estimate your future claims accurately. Flexible spending accounts are "use it or lose it" accounts. Any amounts you contribute that are not claimed by you during the plan year are forfeited at the end of the year. Some plans provide for a grace period of up to 2½ months after the end of the plan year. Your employer is not allowed to refund any part of the balance to you. Example: If you thought you'd have $500 in un-reimbursed medical expense for the year, and contributed that much to your account, but actually ended up with only $300 in expenses, you'd lose the extra $200. We don't want you to get too alarmed on this point. For example, if you do forfeit a small amount of money in any given year, the tax advantage of participating in this plan may make up for the amount of money you've lost.

Saving Taxes through Flexible Spending Accounts

Estimated Annual Savings in Federal Income Taxes and Social Security Taxes

Amount Contributed

15% Bracket

28% Bracket

$100

$22

$36

$250

$56

$89

$500

$113

$178

$1,000

$226

$357

$2,500

$566

$891

These estimates do not include state and local taxes, which may add to your savings. These figures are estimates only. Actual savings are based on your specific income and filing status.

Securities, insurance products and advisory services offered through Cetera Investment Services LLC (doing insurance business in CA as CFGIS Insurance Agency), member FINRA/SIPC. Cetera is under separate ownership from any other named entity.

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