Physician retirement plans: the impact of organizational structure. (Your Money).
Doctors who change affiliations--such as selling their practices and joining a physician-hospital organization--may be surprised by how their retirement benefits can be affected, both positively and negatively.
Not too many years ago, the model for a physician's retirement program consisted of one or more tax-qualified retirement plans maintained by the professional corporation (PC) that employed the physicians in the practice and any staff personnel.
Often, the retirement programs were essentially "tax shelters" providing large current income tax deductions to the PC while enabling significant assets to grow on a tax-deferred basis. Through the creativity of advisors, these plans could be designed to maximize contributions or benefits for the physicians and minimize (if not eliminate) contributions or benefits for all other employees.
Over the years, these programs were buffeted by the efforts of the Internal Revenue Service (IRS) and legislators seeking to restrict or eliminate many of the techniques used to limit the plan costs of these vehicles attributable to non-physicians.
The use of eligibility criteria, vesting standards, separate organizations, leased employee arrangements, comparability analyses and other strategies enabled many physicians to accumulate large retirement savings on a tax-deferred basis at an acceptable cost for others.
While many physicians continue in small practices that are controlled by the physicians (typically through their stock interests in a PC), a growing number of doctors have joined larger organizations that are owned by, controlled by or otherwise formally affiliated with a hospital or health care facility.
Since retirement programs can constitute an important portion of physicians' overall wealth, it is critical that they understand both what the new organization can provide and how any existing programs can be handled. To highlight some of the key concerns, let's focus on two quite different structures on the spectrum of possible arrangements.
Physicians employed by another health care facility
In probably the most basic approach, a physician becomes an employee of a health care entity; this may follow a sale of the practice by the physician group or simply a new affiliation for one or more individual physicians who leave their former practice.
As an employee of this organization, a doctor may participate in any of the new employer's retirement plans for which he or she meets the eligibility criteria-- often one year of service--and become vested in contributions or benefits provided under such plan in accordance with the plan's schedule.
Unlike the physician's former PC plan where any plan contributions for the doctor reduced what was available for cash compensation to the physician group, retirement benefits often are not directly considered in setting the doctor's cash compensation.
The expenses of establishing and maintaining a qualified plan--including periodic amendments to comply with almost annual tax law changes--are the new employer's responsibility.
In fact, a physician may find that, since the per employee administration cost generally decreases as the number of participants increases, the new employer's plan is able to offer features such as loan administration or broader investment choices that were too costly for the PC's program.
Of course, the physician also discovers that the retirement plan no longer is designed and customized around his or her group's objectives and desires. Rather, the sponsoring organization determines what is the best design for accomplishing its objectives (including cost considerations) for establishing and maintaining a tax-qualified retirement plan.
In addition, if a physician becomes employed by a tax-exempt entity, the salary deferral vehicle may be a 403(b) plan rather than a 401(k) plan. While each type of plan has its pros and cons, the investment options in a 403(b) plan are basically limited to annuities and mutual funds.
The physician also must consider what will become of the accumulated contributions or benefits previously earned under the PC's plan. Alternatives may be available depending on whether the PC will continue in operation or whether there has been a disposition of the entire practice.
In some cases, the PC's plan may remain in existence, which would permit the physician to retain his or her funds in that plan's tax-exempt trust. But that option generally is not attractive.
Even though qualified retirement plans are subject to numerous pension law protections (namely, the Employee Retirement Income Security Act of 1974, more commonly known as ERISA), individuals often prefer not to leave their retirement funds under the control of an organization where they no longer work.
If the legal requirements are satisfied that entitle the physician to payment of PC plan benefits, the main alternatives for the doctor involve current taxation upon receipt of the funds or "rollover" of all or a portion of the balance to either an individual retirement account (IRA) established by the participant or the new employer's retirement plan (provided such plan accepts rollovers).
Although each of the available alternatives should be carefully examined, generally a physician will want to postpone any income taxation through one of the rollover techniques. In choosing the vehicle for the rollover, key issues are whether the new employer's plan accepts rollovers (they need not) and, if so, the terms and conditions that will apply to any funds so rolled over.
For example, if the new employer's plan only allows investments in annuity contracts (as may be the case with some section 403(b) programs of tax-exempt hospitals), a physician may prefer a rollover to an IRA in which investments can be made with only a few limitations. Alternatively, the new employer's plan may permit participant loans, which are not allowed with an IRA.
Staff employed by health care or management organization
In other arrangements, the physicians remain in their own practices but all or part of their staff becomes employed by a hospital or affiliated entity that manages physician practices on a centralized basis.
In many cases, little changes in day-to-day practice except for the employment status of the staff members who become employees of another entity and covered by its retirement programs. Where physicians remain employed by the existing PC, their plan benefits generally are not eligible for distribution or any form of rollover.
At first blush, many physicians reasonably believe that the new arrangements can provide an opportunity to save on the costs previously attributable to covering its staffers in their own PC retirement plans.
However, a qualified retirement plan must satisfy certain highly technical standards regarding minimum coverage and nondiscrimination in contributions or benefits, which can snare many of these physician/hospital/management services arrangements.
Basically, a series of refinements made to the Internal Revenue Code and income tax regulations over the years have limited the ability to exclude from consideration in testing a plan's compliance employees of any entities with certain denominated relationships.
So, rules dealing with affiliated service groups, leased employees and certain management organizations may need to be analyzed carefully before deciding whether any staff personnel may need to be covered under the PC's plan even if they are not on its payroll.
In applying these overly complicated rules to a particular structure, the facts and the terms of the arrangement are critical. Unfortunately for retirement plan design, most transactions between physicians and health care entities are driven by non-retirement plan issues.
In some cases, relatively minor changes in structuring an arrangement could have avoided problems that complicate the design of the optimal retirement plan for physicians. Also, since the application of many of the rules still is uncertain, the approach selected largely may depend on the income tax risk tolerance of the physicians with respect to their own retirement plans.
In some cases, physicians may find that they can assure compliance with various tax law mandates only if they include in their plans persons who are not their employees-certain management company or hospital employees--even though these persons are covered under their employer's plan.
Although the cost impact sometimes can be mitigated by arcane techniques such as demonstrating the comparability of benefits through an actuarial analysis or offsetting the other employer's contributions against the amount otherwise due under the PC's plan, such approaches can be cumbersome and subject to some uncertainty.
In other instances, the nature of the relationship between the practice group and a hospital organization may permit the physicians to be covered under such the hospital organization's plan. However, this approach often significantly restricts how much the physician might accumulate in a tax-qualified program, thereby limiting its attractiveness.
The tax field often proves the validity of the saying that if it sounds too good to be true, it probably isn't.
With physician retirement plans, layers of complicated technical rules should not prevent physicians from questioning arrangements that do little to alter economic reality but appear to avoid having to provide benefits for persons who work "shoulder-to-shoulder" with the doctors every day.
Only a full analysis of alternative structures in view of applicable rules can determine how a physician may be impacted by any change in the structure of where the doctor practices.
Regardless of whether a physician is simply changing affiliation or engaging in a complex transaction with a health care organization, an informed consideration of retirement plan opportunities is needed before changes are implemented.
William M. Gerek is director of regulatory expertise, executive compensation practice with the Hay Group. He is based in Chicago and can be reached by phone at 312/228-1814 or by email at Bill Gerek@baygroup.com
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|Title Annotation:||how physicians can analyze their retirement plans|
|Author:||Gerek, William M.|
|Date:||Sep 1, 2002|
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