Over the years, we have addressed potential strategies that a doctor, including a gastroenterologist, can use to reduce income taxes, increase benefits, or build retirement savings. In that time, we have also had the opportunity to consult with hundreds of medical groups on how to implement such strategies for their practice. Unfortunately, the outcome of such consultations can sometimes turn out to be less than fruitful because of office politics related to the age-related perspectives of practice partners.
Typically, while the younger members of medical groups are often very motivated to reduce their income taxes, the older doctors are typically uninterested. Either the older partners are already so close to retirement that they don’t need extra retirement planning or they may be simply set in their ways and don’t want to change anything, i.e., subscribing to the old “if it ain’t broke, don’t fix it” mindset. The result in such situations can be a planning gridlock.
Unfortunately, for the younger physicians, the long-term costs of such practice planning gridlocks are significant – as they will have to work more years to reach the same retirement goals as their older partners. The so-called golden days of medicine are over, and the 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 stand ready to thwart attempts at change.
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. Three solutions to the problem described above follow.
1. Use a Non-Qualified Plan
You should consider using a non-qualified plan, in addition to a traditional qualified plan (401(k), profit-sharing plan, and defined benefit plan). The main attraction of a non-qualified plan is that each physician can choose the amount he/she wants to contribute in the plan formula. This can vary from $0 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 5-6 doctors. The reality is that each physician in a group has different cash flow needs and savings ability. Logically, each doctor needs more/less spending money than others. Physicians who feel like they are hamstrung by their group in their ability to reduce taxes and save for retirement may have a non-qualified plan as a practical alternative. Other benefits to this type of plan include:
• Utilization of the plan in addition to a qualified plan, such as pension, profit-sharing plan/401(k) or SEP IRA
• The plan acts as an ideal “tax hedge” technique against future income and capital gains tax increases
• Balances may grow in a top asset protected environment
• There are no minimum age requirements for withdrawing income (no early withdrawal penalties)
2. 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 address gridlock is to alter the practice’s legal structure so that it accommodates planning flexibility on the part of individual physicians.
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 their own.
If this is the case in your practice (as it is the case in many practices), you might consider an alternative structure when the central entity is neither owned by, nor employs, the doctors directly, but rather is structured through their own professional corporations (PCs) or PAs. In this way, after the group is paid by the insurers, the group, in turn, pays the physicians’ PCs – the payments are structured as 1099 independent contractor income.
From a tax standpoint, there is almost 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, thereby avoiding conflict with partners. More to the point, such planning can give individual physicians the ability to put away $10,000-$50,000 more for retirement each year.
Bring in a consultant
In our business, we speak to over 1,000 physicians each year, many of whom experience the planning gridlock described in this article. Many practices that rely on internal resources to tackle financial gridlocks will end up identifying no solution to their dilemma. In such situations, outside help can be useful in helping physicians realize their financial planning goals. Outside help can consist of advisors or consultants who convince the group to implement creative planning (including the solutions described here). These experts in the field of tax, benefits planning, or corporate law have the credibility and expertise to enlighten practice partners; much more so than fellow physicians. Additionally, outside financial consultants can explain the nuances of legal and accounting issues invoked by careful financial planning that can address the needs of individual partners. Thus, nearly all practices should strongly consider using a firm or advisor who can bring in financial and legal expertise so that productive discussions can begin among partners.
Conclusion
If your practice is grappling with financial gridlock or would like to explore advanced planning options, it may be that differential needs of the various partners are at odds with each other. This article has presented some basic methods of dealing with such gridlock. Nothing can take the place of a professional trained and experienced in the fine points of financial planning for physicians. Authors welcome your questions, and can be contacted at 877-656-4362 or at www.ojmgroup.com
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David B. Mandell, JD, MBA, is a former attorney, consultant, and author of five national books for doctors, including, For Doctors Only: A Guide to Working Less & Building More, as well a number of state books. He is a principal of the financial consulting firm OJM Group www.ojmgroup.com along with Jason M. O'Dell, MS, CWM, who is also a principal and author. They can be reached at 877-656-4362 or mandell@ojmgroup.com.
Disclosure:
OJM Group, LLC. (“OJM”) is an SEC registered investment adviser with its principal place of business in the State of Ohio. OJM and its representatives are in compliance with the current notice filing and registration requirements imposed upon registered investment advisers by those states in which OJM maintains clients. OJM may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. For information pertaining to the registration status of OJM, please contact OJM or refer to the Investment Adviser Public Disclosure web site www.adviserinfo.sec.gov.
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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.