As a full-time working mother who is preparing for maternity leave for my second son, I felt this was a good time to reflect on the true financial impact women face when taking time off from work to care for a newborn, and the important to-do’s to keep your financial life in good order.
Since this isn’t my first rodeo I can note that I know the real importance of taking time off to care for your new baby. It is truly a special time to spend the first few weeks or months with your new bundle of joy. And it is by no means “time off!” It is hard work and kudos to all you mothers.
Not every employer has a policy on maternity leave benefits. If you work for a small employer, for example, it is possible it has never come up and never been addressed. In this case, I encourage you to be a pioneer and work with your employer to help put policies and procedures in place.
WHAT TO KNOW BEFORE YOU GO OUT ON LEAVE
Know your Employee Handbook
One of the easiest and most important things to do is to review your company’s maternity leave policy.
Contained within this policy should be the answers to the following important questions:
• How Long is Maternity Leave?
• How Long is Your Position Guaranteed?
• Is there Paid Maternity Leave?
• What Benefits Will I Receive While I’m on Leave?
I encourage you to set an appointment with your HR personnel to review the process and schedule the ballpark dates you will be out of the office for your leave.
What Is Covered While You Are Out?
One important topic to discuss with your HR personnel is what benefits continue while you are out on leave.
Many employers will continue health insurance but will require that you pay your share of the premiums while you are out. If you are being paid out sick leave or paid time off, you may be able to use these funds to apply towards the premium, or your employer may ask you to write a check each month.
If returning to work after maternity leave is no longer part of the plan, you may be required to pay back the premiums your company was picking up during that time too.
Also important to note, you are only covered for your benefits for up to 12 weeks. Anything longer and you could be covered under Consolidated Omnibus Budget Reconciliation Act (COBRA) if your company has at least 20 employees) or have to purchase insurance on your own. Either way, you may be required to pay both your portion and your employer’s portion for your coverage.
Most Americans will not receive any pay during leave, and disability insurance can help fill this gap.
Disability insurance replaces the loss of income up to a certain percentage (such as 60%) due to a disability.
In most cases, you need to have signed up for disability insurance prior to becoming pregnant since pregnancy is a pre-existing condition. However, there are a handful of states, such as California, that have a state-mandated disability insurance program.
Review your employer-provided benefits package, talk to your HR personnel, and contact the disability insurer to learn about the process for filing a claim. The office staff at your Doctor’s office may also be able to provide guidance on the process from their end.
Family Medical Leave Act (FMLA)
Companies only have to comply with the FMLA (California Family Rights Act (CFRA) in California) when they have more than 50 employees. The FMLA is a federal law requiring covered employers to provide employees with job-protected and unpaid leave for qualified medical and family reasons. The CFRA also has a specific program on bonding.
Talk to your HR personnel to find out if your company is FMLA compliant. In California, if your company does not have to comply with FMLA, but has more than 5 employees, you may be covered under the Pregnancy Disability Leave (PDL). PDL is leave from work to accommodate employees with a pregnancy disability up to four months. It runs concurrently with the FMLA.
Retirement Plan Contributions and Adjustments to Your FSA & DCFSA
Since you won’t be receiving your regular paycheck during your leave, you may need to make adjustments to your retirement plan (such as a 401(k)), Flexible Spending Account (FSA), and Dependent Care Flexible Spending Account (DCFSA) contributions.
Your retirement plan is usually pretty simple to adjust whether it be online or calling the service phone number.
If your goal is to save $12,000 to your 401(k) for the year (the limit is $18,000 for 2017), and you will be on leave 3-months, instead of saving $1,000/month you will need to adjust your contributions to $1,333/month to hit your goal.
A Flexible Spending Account allows you to set aside pre-tax money for healthcare costs (limit is $2,600 for 2017) and a DCFSA allows you to set aside pre-tax money for dependent care expenses (limit is $5,000 for 2017).
You usually select these amounts during your open enrollment period and cannot change them for the year. However, you may be able to work with HR and payroll to adjust the withholding per pay period to hit what you committed.
Since my first-born son, Jonathan, is already in preschool, I increased my DCFSA contributions to ensure I am on track to contributing the maximum $5,000 amount before I go on maternity leave. Alternatively, if you want to keep contributing and didn’t adjust your payments for your remaining paychecks, you may be able to write a check to fund these plans during your leave.
And if you simply don’t want to contribute to your retirement plan, FSA, or DCFSA while you are out, you don’t have to. Since you won’t have a paycheck during your leave and won’t be making contributions to these plans, you will not hit the annual amounts you chose.
THE FINANCIAL IMPACT OF TAKING TIME OFF
Plan your cash flow and budget for the year taking into consideration that you won’t receive a normal paycheck during your leave. You may consider having any sick-leave or paid time off paid out during this time. If your spouse or partner is not working, or you rely on both incomes, you should be prepared to dip into savings.
The Impact to Social Security
One important thing to keep in mind is that taking maternity leave (and therefore having lower income for that year) negatively impacts your social security retirement income.
The Social Security Administration computes your retirement income by calculating your average indexed monthly earnings during the 35 years you earned the most.
Most women have lower social security retirement benefits than men because in general we earn less, and may take time off for leave or to take care of children.
IMPORTANT ACTION ITEMS ONCE THE BABY IS BORN
Signing Up For New Benefits
Even though you are sleep deprived, don’t miss the opportunity to add your newborn to your health insurance. Having a new baby is a “qualifying event” which qualifies you for a special enrollment period for your employee benefits. There is a time limit (usually 30-days) to make changes. In addition to reviewing your health insurance, you can make changes to your other benefits, such as life insurance.
Other Important Financial Planning Areas
Review your financial plan with a CERTIFIED FINANCIAL PLANNER™ professional. A CFP® professional can help you review the five areas of planning: Retirement/Cash Flow, Investments, Insurance (health, life, disability, property & casualty, and long-term care), Tax Planning, and Estate Planning.
A new baby means increased costs which may result in making adjustments to other savings. You may also wish to start up a 529 plan to start saving for college.
Review life insurance needs: life insurance pays your beneficiary a lump-sum upon your death. A growing family may result in an increased need for life insurance. Reasons for life insurance include protecting against loss of income, and providing your surviving spouse or partner with extra funds to pay off the mortgage, pay for your child’s college, etc.
If you don’t already have an estate plan in place, I highly recommend you implement one.
This is very important for a number of reasons, one being that you list the guardian for your child, should something happen to you and your spouse or partner, in your Wills.
Find a local Estate Planning Attorney by asking friends, family, and professionals who they know and recommend. Some employers offer discounts with certain providers to do an estate plan at a reduced cost so be sure to check your benefits.
There are less expensive online options such as LegalZoom, however, I recommend working with an Attorney when possible. Your state may also have free statutory documents you can simply print offline and complete. Reviewing and updating beneficiary designations on retirement accounts, life insurance, and annuities are also an important part of this process.
Contact EP Wealth Today
While all companies have to follow laws to be compliant, there can be variations so it is important to talk to your HR personnel about your company’s rules and your specific situation.
It’s also a good idea to line up childcare early so you aren’t stressed trying to find someone at the last minute when you will be heading back to work soon.
Are you about to be on maternity leave or is your spouse? EP Wealth Advisors is here to help keep your finances in good order while your new bundle of joy enters this world. We have a number of CERTIFIED FINANCIAL PLANNER® professionals who understand this process and are here to help, including a number of women planners and staff who have been through this process personally.
As always, if you have any questions on this article or are expecting a baby and need guidance, please reach out to me. Please also feel free to forward this article to any other expecting parents.
Most importantly, enjoy your time with your new baby!
EP Wealth Advisors (“EPWA”) makes no representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information presented in this report. EPWA has used its best efforts to verify the data included in this report. The information presented was obtained from sources deemed to be reliable. However, EPWA cannot guarantee the accuracy or completeness of the information offered.