When young and old members of a practice group disagree on implementation of a benefits plan, everybody loses. Here's how to work around traditional office politics.
Over the past few years, we have written many articles on potential strategies that a doctor can use to reduce income taxes, increase benefits, or build retirement savings. In that time, we have also consulted with hundreds of medical groups on how to implement such strategies for their practice. Unfortunately, these consultations too often turn out to be less than fruitful because of office politics.
Typically, while the younger members of the group are very motivated to reduce their income taxes, the older doctors are often uninterested. Either they are already so close to retirement that don’t need extra retirement planning or they are simply set in their ways and don’t want to change anything — the old “if it ain’t broke, don’t fix it” mindset. The result: planning gridlock.
Unfortunately, for the younger physicians, the long-term costs of such gridlock are significant — as they will have to work more years to reach the same retirement goals as their older partners. Gone are the “golden days” of medicine...and these new times demand more creative planning. Nonetheless, each year we meet with hundreds of motivated doctors who cannot implement the planning we recommend because the powers that be in their group won’t allow it.
We decided to write this article to suggest some alternatives to this dilemma. If you see yourself in this situation, please do not hesitate to contact us.
Use a Hybrid Benefit Plan
You should consider using a hybrid benefit plan, in addition to a traditional qualified plan (401(k), profit-sharing plan, defined benefit plan). The main attraction of a hybrid benefit plan is that each physician can choose the amount he/she wants to contribute in the plan formula. This can vary from $150 to $100,000 per year.
Simply because physicians can participate at their desired level, this plan is the only advanced technique (and it’s not really very advanced) that we have successfully implemented for a medical group larger than 4 doctors. The bottom line: each doctor has their own personal situation and overhead to handle, so each doctor needs more/less spending money than others. Physicians who feel like their hamstrung by their group in their ability to reduce taxes and save for retirement may have this as their only hope. Other benefits to this type of plan include:
• Utilization of the plan in addition to a qualified plan like pension, profit-sharing plan/401(k) or SEP IRA;
• Contributions can qualify for current tax deductions;
• The plan acts as an ideal “tax hedge” technique against future income AND capital gains tax increases
• Balances can grow in a top asset protected environment
• Employee participation requires a minimal funding outlay;
• There are no minimum age requirements for withdrawing income (no early withdrawal penalties);
Employ a more flexible corporate structure
Despite the availability of an elective benefit plan described above, we still see medical groups stuck in planning gridlock. Another way to solve this problem is to alter the practice’s legal structure so that it allows individual physicians their own planning flexibility.
In the typical medical group structure, there is one legal entity — whether it be a corporation, LLC, or professional association (PA). Physicians are either owners of the entity (informally referring to themselves as “partners”) or non-owner employees. In all such cases, the physicians have no ability to separate themselves from the central legal entity. If the central entity does not adopt a planning strategy, no individual doctor has any flexibility to adopt it on their own.
If this is the case in your practice, you might consider a superior structure when the central entity is not owned by, nor employs, the doctors directly, but rather through their own professional corporations (PCs) or PAs. In this way, the group is paid by the insurers and the group, in turn, pays the physicians’ PCs — bets through 1099 independent contractor income.
Tax-wise, there is no downside to the central entity or to the doctors who are not motivated to engage in any additional planning. However, for the physicians who want to implement planning strategies, they may do so through their individual PCs. Their strategies will be implemented at the PC level, leaving the central entity unchanged.
Nevertheless, if such planning effort results in the ability of physicians to put away $10,000-$50,000 more for retirement each year, it is obviously well worth the effort.
Bring in an expert
In our practices, we speak to over 1,000 physicians each year, many of whom experience this planning gridlock. Most, in fact, find no solution to this dilemma. The only ones that are able to navigate past the gridlock have help — typically in the form of outside advisors or consultants who convince the group to implement creative planning (include the solutions below). These experts in the field of tax, benefits planning, or corporate law have the credibility and expertise to convince your partners to “see the light” in a way that fellow physicians cannot and they can explain attorney-to-attorney, CPA-to-CPA the issues involved. Often, we are asked to play such a role. But whether it be us or another advisor or firm, strongly consider bringing in an expert to speak to your group in order to get productive discussions started.
If you are personally grappling with financial gridlock in a group practice or would like to explore advanced planning options, be advised that your partners may be an important hurdle to overcome. This article lays out some of the ways to deal with such a roadblock. However, nothing substitutes for working with a professional experienced in these areas. The authors welcome your questions. You can contact them at (800) 554-7233 or through their website www.ojmgroup.com.
David Mandell is an attorney, lecturer, and author of five books for physicians. Jason O’Dell is a financial consultant, lecturer and author of two books for physicians. They are both principals of the financial consulting firm O’Dell Jarvis Mandell, LLC.