Over the past few years, we have written many articles on potential strategies that podiatrists can use to reduce income taxes, increase benefits or build retirement savings. Unfortunately, these consultations often turn out to be less than fruitful because of office politics.
While the younger members of a podiatry group are often very motivated to reduce their income taxes, the older, more established doctors are often uninterested. Either they are already so close to retirement that they don’t need extra retirement planning or they are simply set in their ways and don’t want to change anything. What is the result of the old “if it ain’t broke, don’t fix it” mindset? 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 so-called “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.
However, there are some worthwhile alternatives to financial gridlock. With this in mind, let us take a closer look at some potential solutions.
Consider The Merits Of
Non-Qualified Retirement Plans
You should consider using these plans in addition to your typical qualified pension or profit-sharing plan. While tax and ERISA-qualified plans require the participation of virtually all employees, non-qualified deferred compensation plans (NQPs) can be offered to select employees. With these plans, only certain physicians need to participate, even if it means only one or two out of a large group. Given this, younger physicians could participate in such a plan and older doctors can opt out if they desire to do so.
Furthermore, when comparing NQPs with qualified plans, NQPs are typically much easier and less expensive to implement. Therefore, if only a few physicians decide to implement a NQP for their practice, they could personally cover all plan expenses themselves so their partners truly would have no out-of-pocket costs. One would think that this fact alone would eliminate any gridlock.
However, NQPs do not win automatic approval. Since they are at least partially deductible to the practice, NQPs must usually be formally adopted by the corporation or limited liability company (LLC). This requires the proper legal paperwork. Also keep in mind that compensation accounting may need to be adjusted in order to ensure that each doctor not participating is in the same position he or she was in before the plan was in place.
Nevertheless, these adjustments are easy for the attorney and/or accountant to implement if one pushes hard enough for the implementation of NQPs. After all, if Fortune 500 companies can adopt such plans for their executives, the corporate inertia from a relatively tiny medical group should not be insurmountable.
In the end, then, NQP adoption typically succeeds or fails depending upon the effort by the motivated physicians. When hundreds of thousands, if not millions, of retirement dollars are at stake, this extra effort will be handsomely rewarded.
What About Pursuing A More Flexible Corporate Structure?
Despite the availability of NQPs, we still see medical groups stuck in planning gridlock. Another way to solve this problem is to alter the practice’s legal structure so it allows individual physicians their own planning flexibility.
In the typical medical group structure, there is one legal entity, whether it is 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 his or her own.
If this is the case in your group practice, you might consider a superior structure in which the central entity is not owned by, nor employs, the doctors directly. Instead, each physician in the practice would have his or her own professional corporation (PC) or PA. In this scenario, the group is paid by the insurers and the group, in turn, pays the physicians’ PCs 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 advanced strategies, they may do so through their individual PCs. They could implement their strategies at the PC level without affecting the central entity.
While this may seem simple, it is not. Experienced corporate counsel is required to navigate issues such as the state rules on the ownership of medical practices, the ERISA and other rules on affiliated services, as well as Medicare billing rules among other considerations.
Nevertheless, if such a planning effort results in the ability of physicians to put away anywhere between $10,000 to $50,000 more for retirement each year, it is obviously well worth the effort.
Seek Out The Advice
Of A Financial Planner
As noted previously, we speak to over 1,000 physicians each year, many of whom experience this planning gridlock. Unfortunately, the vast majority of them struggle to arrive at a solution to this problem. The only ones that are able to navigate past the gridlock have help, which typically comes in the form of counsel from outside advisors or consultants who convince the group to implement creative planning.
If you are personally grappling with financial gridlock in a group practice or would like to explore advanced planning options, keep in mind that your partners may prove to be the toughest hurdles to overcome. 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. Consider bringing in an expert to speak to your group in order to get a jumpstart on productive discussions.
Mr. Jarvis and Mr. Mandell are the authors of The Doctor’s Wealth Protection Guide (endorsed by the Florida Medical Association) and co-founders of Jarvis & Mandell, LLC (see www.jarvisandmandell.com ). You can reach them at (888) 317-9895.
For a free tape on asset protection, retirement, and tax planning, please call 800-554-7233.