Retirement Considerations as a Hospital Employee

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One of the significant downsides of being an employee of a large institution is that you have virtually no control of the tax-saving retirement plans, benefit plans, fringe benefit plans or other write-offs.

Each month, we speak with physicians who are hospital employees and are frustrated with the type of tax and retirement planning options they have, compared to their colleagues in private practice. At the same time, a common trend in the medical landscape today is the acquisition of medical practices by hospitals — so more and more specialists are becoming hospital employees every day.

If you are a presently a hospital employee or one who is considering the move, this article is a must-read.

If you’re a hospital employee now

One of the significant downsides of being an employee of a large institution is that you have virtually no control of the tax-saving retirement plans, benefit plans, fringe benefit plans or other write-offs. Compare this to an orthopedist in a practice he/she owns, where all of these important financial options are available.

Over a career, these tools can mean the difference between an early or late retirement or the quality of that retirement, financially. The case study below will be valuable for you to understand, since it illustrates what you are now giving up (though you may not have realized it) and how you can improve your benefit offering at the hospital.

If you become a hospital employee through practice acquisition

If you are not presently a hospital employee, but are considering joining a hospital, there are a few alternatives to outright acquisition of a medical practice by the hospital (such as joint ventures). However, since the vast majority of transactions are outright acquisition — where the physician becomes a hospital employee — we will focus our discussion here on that model.

The traditional outright acquisition model has distinct positives and negatives for the doctor. The principal positives are the following:

a. Reduced legal exposure for the doctor, as he/she is now a hospital employee

b. Reduced overhead expenses — rent, administration, liability insurance, etc.

c. In some circumstances, increased financial security for the practice as the hospital may support it financially or guarantee it a certain flow of patients

The significant negatives include:

a. Loss of autonomy — the physician must report to hospital executives

b. Loss of control of his/her financial package — including qualified plan and other benefit planning

While the first negative may be more frustrating on a personal level, the second negative can be quite costly to the doctor over his/her career.

Case Study: Orthopedic surgeon Oscar sells to a hospital

At 45 years old with a healthy practice, Oscar would likely have either one, or both, of the following Qualified Retirement Plans to help him save for retirement, and reduce his current taxable income. These plans would include:

A defined contribution plan, also referred to as a “profit-sharing plan.” In this plan, Oscar can defer up to $51,000 in 2012. This contribution limit is typically increased each year to keep pace with inflation. Oscar’s investment will accumulate on a tax-deferred basis as well, but every dollar withdrawn in retirement will be taxed as income.

A defined benefit plan is also funded with tax-deferred dollars. The annual contributions are calculated each year based on conservative growth assumptions, and a specific amount to be attained at a specific age, for example, $1 million at age 62.

For the purposes of our case study, let’s say Oscar is making tax-deferred annual contributions of $45,000 into his Defined Benefit Plan. These funds will also accumulate on a tax-deferred basis, and withdrawals during retirement will be taxed as income.

For purposes of the analysis below, we will assume that Oscar maximizes his profit-sharing contribution, but does not presently take advantage of a defined benefit plan. More savings-motivated physicians will give up even more by becoming a hospital W-2 employee.

When Oscar becomes a hospital W-2 employee, he will lose the more tax-beneficial qualified plans above — both the profit-sharing plan and/or the defined benefit plan. Even in a “likely hospital scenario,” Oscar would have access to a 403(b), which will allow him to defer only $17,500 in 2013. In a “best case” hospital scenario, Oscar would also have access to a 457(b) plan, which is very similar to a 403(b), and would allow Oscar to defer another $17,500 in 2013.

In addition to his Qualified Retirement Plans, as a practice owner, Oscar also enjoys the ability to deduct business-related expenses, such as a portion of his car lease and home office expenses.

Let’s say Oscar pays $800/month for his car lease, and claims he uses his vehicle for business purposes 70% of the time. The business portion of his lease payment will be deductible to the extent allowed against his business income. However, as a W2 employee, Oscar can only take that deduction to the extent that his employee business expenses, along with other miscellaneous deductions, exceed 2% of his AGI.

Oscar would also be able to deduct business-related expenses, such as computer and electronic equipment, software, office furniture, office supplies, travel expenses, etc. For this example, we’ll assume Oscar is deducting $4,000/year for these expenses. As a W-2 employee of the hospital, Oscar will also lose the ability to deduct these expenses unless they exceed 2% of AGI.

Assuming Oscar’s gross annual income is $500,000, let’s look at how the two scenarios currently compare below. Again, we will assume here that Oscar only participates in a profit-sharing plan — for doctors who also have a defined benefit plan, these numbers would likely look even more dramatic:

Oscar’s case is not unique. In fact, it is quite typical. The reality is that a physician gives up most of the benefit of being a business owner when he/she becomes a hospital employee (some expenses can still be deducted, but only to the extent they exceed 2% of AGI).

As above, the ability to implement aggressive retirement plans, fringe benefit plans and the tax savings that goes along with them has a direct impact on a physician’s long-term wealth creation. Giving up that ability is significant — whether the hospital falls into a “likely” or “best” case scenario.

A Potential Solution: A hybrid benefit plan ideally suited for hospitals

While the reality of what Oscar gave up may be startling, there is good news: Hospitals around the country are beginning to learn about, and adopt, a particular type of benefit plan that can provide Oscar with a way to capture all of his lost benefits, and more. Further, this plan costs the hospital nothing!

It is not surprising that hospitals are starting to see the fit here — it helps their existing and soon-to-be-recruited doctors significantly and costs them nothing. A few brief facts about this type of benefit plan:

a. This benefit plan is authorized by a particular section of the Internal Revenue Code that has been in the code for over 30 years, an extremely long and stable legislative history.

b. Nearly eight years ago, a Revenue Procedure was issued that created safe harbor rules for calculating the economic benefits to be included as taxable compensation under the plan. This should give any hospital counsel or human resources office comfort to move forward with the plan.

c. The hospital can offer this plan in addition to its 403(b) or other qualified retirement plan.

d. The hospital can decide to offer this to all employees, just physicians, or some other classification tied to employment

e. The plan is asset protected at the highest level in many states and can be designed for solid asset protection in all states.

Case Study: Oscar’s hospital offers this hybrid benefit plan

Let’s return to Oscar’s situation above. Now let’s assume that Oscar’s hospital adopts this benefit plan as part of its package and offers it to Oscar as a hospital doctor employee.

Now, in addition to the 403(b), he is able to contribute another $50,000 into this benefit plan. He funds this plan for five years and then stops. How does Oscar now benefit? Let’s see:

• This plan saves him an additional $6,000 to 8,000 in taxes per year — for a total of $30,000 to $40,000 in tax savings over the five years.

• The contributions into his plan grow totally asset protected under his state’s law.

• If Oscar ever leaves the hospital employment, he takes 100% of his funds in the plan with him, the hospital will receive nothing.

• Presuming a 7% return in the market, Oscar would be able to take out $48,102 per year tax free in retirement, ages 65 thru 84. These numbers would be even larger if he waits longer to retire.

• All of the above benefits (and others) Oscar will enjoy — in addition to the hospital’s 403(b) and/or 457 plan that he also funds.

Given the implementation of this plan, let’s take another look at Oscar’s Scenario Comparison:

With the hybrid plan, Oscar has been able to reduce his “lost deductions” by $17,000-plus per year, getting him almost to “even” with his deductions when he owned his practice.

Even more importantly, the plan contributions are flexible. In other words, Oscar could contribute up to $100,000 per year into the Hybrid Plan, in addition to the 403(b) and 457 plans, giving him another $17,000-plus of deductions. By doing this, not only would he be better off deduction-wise than he was in his practice, but he would be funding a plan that was asset protected in his state and acts as a tax hedge against future income and capital gains tax increases.

Conclusion

If you are presently a hospital employee, or you may become one — and increasing your deductions and tax-beneficial retirement income while having asset protection is important — then you should work with your other physicians, the board and the human resources department to get this benefit plan added to the hospital’s benefit package. As noted above, this plan can be structured with no cost to the hospital, so it shouldn’t be hard to get approved.

David B. Mandell, JD, MBA, is an attorney, author of five books for doctors, including For Doctors Only: A Guide to Working Less and Building More, and principal of the financial planning firm OJM Group, where H. Michael Lewellen, CFP, serves as Director of Financial Planning. They can be reached at (877) 656‐4362 or mandell@ojmgroup.com. For a free (plus $10 shipping and handling) copy of For Doctors Only: A Guide to Working Less and Building More, please call (877) 656-4362. If you would like a free, shorter ebook version, please download our “highlights” edition at www.fordoctorsonlyhighlights.com.

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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.