One of the unfortunate realities of group medical practice is the tendency of office politics to derail financial strategies to reduce income taxes, increase benefits or build retirement savings. 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 result: planning gridlock.
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. 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.
This article will suggest some solutions to this problem.
Use Non-Qualified Plans
Consider using non-qualified retirement 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. In this context, this means that only certain physicians need participate—even if it means only one or two out of a large group. Younger physicians could participate in such a plan and let the older uninterested doctors opt out.
Further, when compared with qualified plans, NQPs are typically much easier and less expensive to implement. Even if a few physicians decide to implement a NQP for their practice, they could personally cover all plan expenses themselves—so their partners truly have no out-of-pocket costs. This alone might eliminate any gridlock.
Still, NQPs do not win automatic approval. Because they are at least partially deductible to the practice, they must usually be formally adopted by the corporation or limited liability company (LLC). This requires the proper legal paperwork. In addition, compensation accounting may need to be adjusted to make sure 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 you push hard enough. 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, 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.
Use a Flexible Corporate Structure
Another way to solve the gridlock 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. 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 own.
If this is the case in your practice, consider a superior structure in which the central entity is not owned by, nor employs, the doctors directly, but rather employs them 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' PC—for example, 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, physicians who want to implement advanced strategies do so through their individual PCs. Their strategies will be implemented at the PC level, leaving the central entity unchanged.
This, too, 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, ERISA and other rules on affiliated services, and Medicare billing rules, among others.
Nevertheless, if such a planning effort results in the ability of physicians to put away $10,000 to $50,000 more for retirement each year, it is obviously well worth the effort.
Bring in an Expert
In our practices, we speak to more than 1,000 physicians each year, many of whom experience this planning gridlock. Most, in fact, find no solution to this problem. 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. 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. Often, we are asked to play such a role. But whether it's 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.
Mr. Mandel is an attorney, lecturer and author of Wealth Protection, MD. He is also a co-founder of the Wealth Protection Alliance, a nationwide network of independent financial advisory firms. Contact him at 1 (800) 554-7233 or info@wealthprotectional liance.com. Mr. Ahuja is a partner at Wealth Planning Associates, a charter member of the WPA. Contact him at 1 (800) 554-7233.