In today’s medical economic environment, many physicians are attracted to the seeming “comfort” of a large group practice. However, larger groups often fail to react quickly and plan against challenges. In the vast majority of group practices with more than three or four physicians, they suffer from what we will call “lowest common denominator” or “LCD” planning.
LCD planning occurs when the practice will only implement the asset protection, tax-reduction, qualified or non-qualified planning techniques that everyone can agree on. This is not surprising as doctors are notoriously independent, intelligent and very busy. There are often too many opinions and distractions for a group of doctors to unanimously agree on anything other than the simplest (and least beneficial) strategies.
We have spoken to thousands of doctors who are frustrated with their practice’s LCD planning. The very physicians who want to implement more advanced and beneficial planning ideas are usually the same ones who are doing most of the work and generating most of the revenue for the practice. They are often “caught in the middle” in their practices.
Their younger partners are usually busy paying off student loans or paying for a big new house. They can’t afford to fund retirement tools that may reduce taxes, because they need every dollar they earn. The older doctors have the “if it ain’t broke, don’t fix it” mentality. The problem is that under the new medical economic environment, it is “broke.” The old ways cannot continue to be standard operating procedure.
If you are a physician who would like your group to consider more proactive planning, this article is for you. It introduces a few concepts that can be implemented to help you avoid LCD planning and address these significant financial threats. We have seen these techniques work for solo practitioners up to very large groups.
Use a “hybrid” benefit plan
If you are in a LCD situation, you should consider using a hybrid benefit plan in addition to a traditional qualified plan, such as 401(k)s, profit-sharing plans, money purchase plans or defined benefit plans. The main attraction of a hybrid benefit plan created under new pension rules is that each physician can choose the amount he or she wants to contribute in the plan formula. This can vary from $150 to $100,000 per year.
This simple plan can be implemented for a one-entity medical group with one, two or even dozens of doctors. Other benefits of 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; and
— There are no minimum age requirements for withdrawing income (no early withdrawal penalties).
Employ a more flexible corporate structure
The plan above is the only significant plan a practice with a “one entity structure” (professional corporations, professional association, etc.) can utilize. This one entity structure promotes LCD planning gridlock. A common way to solve this problem is to alter the practice’s legal structure so that it allows individual physicians their own planning flexibility, without disrupting their day-to-day operations or requiring new insurance contracts or Medicare provider numbers.
In the typical medical group structure, there is one legal entity — like 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 beneficial corporate planning strategies for his or her benefit.
If this is the case in your practice, you might consider a superior structure. Doctors can own their share of the practice through their own professional corporations (PCs) or PAs. In this way, the group is paid by the insurers, pays its bills and overhead and then pays the physicians’ PCs — best through 1099 independent contractor income.
For the physicians who want to implement planning strategies beyond LCD, they may do so through their own individual PCs without any impact to partners’ planning or operations. The strategies will be implemented at each doctor’s PC level, leaving the central entity and its operations unchanged. We have seen this strategy used successfully in some of the largest medical practices in the United States.
Bring in an expert
The most common hurdle to implementing advanced planning is planning gridlock. Unfortunately, most find no solution to this dilemma as their practice planning gridlock is what stops them from creating a structure that allows them to avoid gridlock — a Catch-22.
Because of practice politics, the doctors who are able to navigate past the gridlock generally have the help of outside experts (with whom none of the partners or other legal or tax advisors have any negative history). Experts in the fields of tax, benefits planning and corporate law have the credibility and expertise that increase the probability that you will be able to convince your partners to “see the light” in a way that fellow physicians cannot. These advisors can often explain the suggested structure from attorney-to-attorney or CPA-to-CPA so that the local advisors are on board, agreeable and involved in the planning.
Push your partners now!
Financial success in the practice of medicine is harder than ever. Even if you are grappling with financial gridlock in group practice, you can explore advanced planning options to address these challenges.
Jason O’Dell is a consultant, author of two books for doctors, and principal of the financial consulting firm OJM Group, where Carole Foos works as a CPA and tax consultant. All readers are entitled to a free copy (pay just $10 shipping and handling) of the authors’ book For Doctors Only: A Guide to Working Less and Building More. Call (877) 656-4362.
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This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein.